USD/JPY climbs as fading US-Iran de-escalation hopes and strong US data support Dollar

USD/JPY edges higher on Tuesday, supported by a modest rebound in the US Dollar (USD) as market sentiment turns risk-averse. Uncertainty around US-Iran peace talks ahead of the ceasefire deadline is fueling concerns of further escalation, while elevated Oil prices continue to weigh on the Japanese Yen (JPY), given Japan’s heavy reliance on imported energy.

At the time of writing, USD/JPY is trading around 159.57, up nearly 0.47% on the day.

The rebound in the US Dollar comes as the de-escalation narrative seen in recent days begins to fade following the weekend flare-up in the Strait of Hormuz, which has dampened expectations that negotiations expected in Pakistan will materialize.

Pakistan’s Information Minister said a decision from Iran to attend talks before the end of the two-week ceasefire is critical, while Tehran has yet to confirm its participation. Meanwhile, a White House official said that US Vice President JD Vance has not yet departed for the talks.

With the current two-week ceasefire set to expire on Wednesday, markets are increasingly wary of renewed escalation. Donald Trump signaled a hardline stance, reiterating that he does not intend to extend the current truce and warning that fighting could resume if no agreement is reached.

On the Iranian side, Mohammad Bagher Ghalibaf, Speaker of Iran’s Parliament, said Tehran has been “preparing to show new cards on the battlefield” and would “not accept negotiations under the shadow of threats.”

Against this backdrop, a near-term reopening of the Strait of Hormuz appears unlikely, keeping Oil prices elevated and inflation risks in focus while raising concerns about economic growth. As a major energy importer, Japan faces rising import costs when crude prices increase, which tends to weigh on the JPY.

Oil-driven inflation is also complicating the monetary policy outlook for both the Federal Reserve (Fed) and the Bank of Japan (BoJ). Markets expect the Fed to delay rate cuts and keep rates unchanged in the coming months, while the BoJ is likely to remain on a gradual tightening path, although reports suggest it could hold rates at its April meeting, against earlier expectations of a hike.

Beyond geopolitics, firm US economic data released earlier in the session added to the Dollar’s strength. Retail Sales rose by 1.7% MoM in March, beating expectations of 1.4% and accelerating from February’s 0.7% increase, driven in part by higher gasoline prices, while the ADP Employment Change 4-week average also increased to 54.8K from 39K.

Looking ahead, traders will closely monitor developments around US-Iran tensions and the ceasefire deadline, along with movements in Oil prices and the US Dollar for fresh directional cues. Intervention risks near the 160.00 psychological level may also limit further gains in USD/JPY.