We have seen some big moves across financial markets today with oil prices sliding more than 10% amid optimism about a deal between the US and Iran to end the blockade in the Strait of Hormuz, before prices bounced back as fresh doubts emerged. With oil plunging earlier, stagflation worries receded sharply, and investors piled back into European stocks, metals and foreign currencies, while selling the US dollar. The USD/JPY was apparently hit again by further dollar selling from Japan overnight, causing it to drop to near the 155.00 handle. The near-term USD/JPY forecast remains tilted to downside amid ongoing FX intervention and the dollar selling, but a lot now depends on what oil prices do from here. Will the two sides agree to any deal?

 

 

 

Risk appetite improves as crude oil takes a plunge

 

Risk appetite has picked up sharply today, with equities pushing higher as oil prices slide. The move follows a string of encouraging headlines on the US-Iran front. Late yesterday, US Secretary of State Marco Rubio confirmed that “Operation Epic Fury” had concluded, with its objectives met. Shortly after, Donald Trump announced a pause to “Project Freedom”, signalling room for negotiations with Iran. This was a step markets quickly interpreted as progress towards a deal, and so oil sold off after futures re-opened. Since then, prices haven’t looked back much, with Brent sliding now to below $100.

 

 

Momentum built further on reports from Axios suggesting both sides are close to agreeing a one-page framework to end hostilities, with a response from Tehran expected within 48 hours. Unsurprisingly, that combination has fuelled optimism across risk assets. Market’s reaction suggests that the situation could soon be resolved. Let’s hope that is the case and we don’t see any fresh escalations. But for now, Brent oil was still holding above its mid-April lows, where the latest rally began when talks broke down.

 

Trump’s fresh ultimatum halts oil-slide

 

After the big drop in oil prices, Trump has just posted the following:

 

“Assuming Iran agrees to give what has been agreed to, which is, perhaps, a big assumption, the already legendary Epic Fury will be at an end, and the highly effective Blockade will allow the Hormuz Strait to be OPEN TO ALL, including Iran. If they don’t agree, the bombing starts, and it will be, sadly, at a much higher level and intensity than it was before. Thank you for your attention to this matter!”

 

Markets have reacted slightly negatively to this latest post, but essentially it doesn’t change anything. The key sticking point is whether Iran would agree to remove its highly enriched uranium from the country. That’s what the US president is presumably referring to. This is something Iran has rejected until now.

 

USD/JPY forecast: Attention to turn to US data

 

In recent days, the US dollar was regaining momentum as talks between the two sides had stalled and oil prices went high. On top of this, the Federal Reserve appeared to be gradually stepping back from its easing bias, and this was also supported by resilient US data and company earnings.

 

However, today, that trend has changed. While oil still remains elevated compared to pre-war levels, if the Strait of Hormuz fully reopens prices could fall even more. If so, that could further weigh on the dollar in the near term as rate cut expectations creep back higher. That should also allow attention to shift back to fundamentals.

 

It is worth pointing out that any sustained rebound in economic activity following any resolution could just as easily keep inflation sticky, preventing the dollar from sliding too much in the longer run.  For now, though, markets are leaning into the positive narrative, which is benefiting the EM currencies the most. The likes of the euro and yen, currencies that had come under pressure because of the oil shock, were also benefitting largely from this slide in oil prices.

 

Meanwhile, today’s US ADP employment report (expected at +120k) could also prove influential. A downside surprise would likely reinforce the softer dollar narrative.

 

For now, the tone remains tilted towards risk-on and a softer greenback, keeping the short-term USD/JPY forecast tiled to the downside.

 

Technical USD/JPY forecast and key levels to watch

 

Additional pressure on the dollar may have come from renewed Japanese activity in FX markets, as we saw renewed sudden drops in the USD/JPY overnight.

 

 

Technically, the pair has now reached and reacted from the key short-term support around 155.00-155.50 area. This is where recent lows meet the support trend of the bullish channel. A break below here could pave the way for fresh selling in the days and weeks to come, data and oil permitting. Key resistance is now at 157.50 to 158.00 area. Lots of other short-term levels in between.

 

 

 

 

— Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R