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Brown Brothers Harriman’s (BBH) Elias Haddad anticipates the Bank of Japan (BoJ) will leave its policy rate at 1.00% after June’s hike, with inflation still below target and markets pricing only gradual tightening. While USD/JPY has surged on higher Oil prices, Haddad notes Japan’s macro backdrop would otherwise favor a firmer Japanese Yen (JPY) over the coming weeks.

BoJ seen on hold as USD/JPY elevated

"The BoJ is widely expected to keep the policy rate at 1.00% after delivering a well-telegraphed 25bps hike in June. Inflation is running below the bank’s 2% target."

"The swaps curve price in a 25bps rate hike by year-end and a total of 60bps of tightening to between 1.50% and 1.75% over the next twelve months. That would still leave the policy rate near the middle of the BoJ’s estimated neutral range (1.10%-2.50%) while the economy operates above potential."

"USD/JPY surged to near a 40-year high last week underpinned by firmer crude oil prices. Absent the renewed oil shock, Japan’s macro backdrop would favor a firmer JPY."

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• USD/JPY pulls back from 40-year highs just below 165.00 and returns to the 163.50 area.
• The decline responds to USD's weakness on risk-on markets, rather than JPY strength.
• Key support is at the 162.80 area.

The Japanese Yen (JPY) pares recent losses against the US Dollar (USD) on Monday, favoured by a relief rally, as the US and Iran halted their hostilities, opening the door for further negotiations. The USD/JPY pair has pulled back from fresh 40-year highs right below 164.00, but it remains contained at the 163.50 area, keeping the broader bullish trend intact.

The recent JPY recovery has more to do with short-covering of long US Dollar positions, amid fresh hopes of a peace process in the Middle East than with intrinsic Yen strength. Apart from that, investors are likely to remain wary of placing large directional positions in the pair, awaiting interest rate decisions by the Federal Reserve (Fed) and the Bank of Japan later this week.

Analysts at MUFG observe that the “drop in energy prices at the start of this week has brought some much-needed relief for Japanese policymakers and helped to slow upward momentum for USD/JPY.” However, they caution that this respite may be temporary, warning that “without hawkish guidance (by the Bank of Japan), the yen is vulnerable to further weakness, especially if the Fed delivers a hawkish policy surprise this week.”

Technical Analysis: Key support lies at the 162.80 area

The USD/JPY pair trades at 163.67 at the time of writing, holding a constructive bullish stance, with dips contained well above a rising trend-line from early-July lows. Intra-day charts are hinting at a softer bullish impetus, with the 4-hour Relative Strength Index (14) trending back toward neutral territory, near 59, and the Moving Average Convergence Divergence (MACD) line crossing below the Signal line, which is a bearish sign.

Bears, however, remain contained above previous highs, in the mid-ranges of the 163.00s, with key support at the confluence of the mentioned trendline and July 6 and 8 highs in the 162.70-162.90 area. A confirmation below these levels puts sellers in control and adds pressure towards the July 17 and 20 lows at the 162.15 area.

On the topside, immediate resistance emerges at the horizontal barrier around last week's highs, near 165. Further up, the 127.2% Fibonacci retracement of the July 17-23 target, at the 163.50 area, emerges as a potential target.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

ING analysts Warren Patterson and Ewa Manthey note that Brent has retreated sharply, briefly dropping below US$90/bbl as the US and Iran paused further strikes. They stress that disruptions in Russia and the Red Sea continue to constrain supply, while speculative net longs in Oil and ICE gasoil have increased, driven mainly by short covering and middle distillate tightness.

Brent retreats as risks stay elevated

"The price action in oil this morning clearly reflects the market's desperation for positive news. After 13 days of strikes, the US has held off on further strikes over the last 2 days, while Iran also paused retaliatory attacks. The recess has seen Brent retreat aggressively, down more than 7% at one stage, briefly below US$90/bbl."

"While this is the first tangible signal of de-escalation, the reasons behind it are less clear. There’s little explanation from the US. Also, it hasn’t yet led to any meaningful pickup in vessel flows through the Strait of Hormuz."

"We’re unlikely to see any recovery until there’s clarity on whether this de-escalation is more permanent and whether vessels can navigate the strait without fear of attack."

"Disruptions are piling up. Oil loadings at Russia’s Sheskharis terminal in Novorossiysk have reportedly been halted since 21 July. Bloomberg notes the facility has shipped roughly 650k b/d this year."

"This coincides with the suspension of oil loadings at CPC terminal, which had been shipping around 1.7m b/d in recent months. These disruptions come amid a surge in Ukrainian drone attacks on Russian energy infrastructure."

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Silver prices (XAG/USD) rose on Monday, according to FXStreet data. Silver trades at $59.43 per troy ounce, up 2.26% from the $58.12 it cost on Friday.

Silver prices have decreased by 16.39% since the beginning of the year.

The Gold/Silver ratio, which shows the number of ounces of Silver needed to equal the value of one ounce of Gold, stood at 68.93 on Monday, down from 69.73 on Friday.

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OCBC’s Sim Moh Siong and Christopher Wong highlight that markets have repriced the risk of a July Fed hike higher after Oil-driven inflation worries, but still expect no move. A hawkish hold would keep the US Dollar (USD) supported by pushing tightening expectations further out, while a poorly explained pause could hurt Fed credibility, lift inflation breakevens and weigh on the Dollar over the coming months.

Hawkish hold would underpin Dollar

"The probability of a July Fed rate hike fell to just 10% following benign US inflation data but has since rebounded to 35% as higher oil prices reignited inflation concerns."

"In short, markets have shifted from viewing a July hike as a remote possibility to a meaningful risk."

"If the Fed remains on hold, as we expect, the market reaction will hinge on its communication."

"A hold accompanied by hawkish guidance would likely push expected rate hikes further out the curve without materially altering the roughly 55bp of cumulative tightening priced in through mid-2027. In this scenario, the USD should remain supported."

"However, a decision to leave rates unchanged with little explanation could be interpreted as dovish and create confusion about the Fed's reaction function. That risks lifting long-end inflation breakevens, a development that would be negative for the USD."

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• Silver gains more than 2% and trades around $59.45 as renewed demand for precious metals supports prices.
• Hopes of de-escalation between the United States and Iran send Oil prices sharply lower, easing inflation concerns.
• Markets now turn their attention to the Federal Reserve's monetary policy decision on Wednesday.

Silver (XAG/USD) rallies on Monday and trades around $59.45 at the time of writing, up 2.27% on the day. The white metal benefits from a sharp decline in Oil prices following renewed hopes for de-escalation between the United States (US) and Iran, a backdrop that strengthens expectations of a more accommodative monetary policy from major central banks.

Military tensions between the two countries have paused after US Ambassador to the United Nations Mike Waltz said US President Donald Trump had decided to suspend military strikes to allow more time for diplomacy. According to Reuters, an Iranian official also stated that Tehran would halt its attacks as long as Washington does the same.

This development is weighing heavily on Oil prices, with West Texas Intermediate (WTI) falling by nearly 8% at the time of press. Lower energy prices help ease concerns over persistently high inflation, reducing the likelihood of additional monetary tightening and supporting non-yielding assets such as Silver.

At the same time, lower US Treasury yields and a weaker US Dollar (USD) are providing additional support to the precious metal. Investors have scaled back expectations for further interest rate hikes as inflation risks linked to energy prices continue to fade.

Market attention now turns to the Federal Reserve (Fed) monetary policy decision on Wednesday. The central bank is widely expected to leave interest rates unchanged, but investors will closely scrutinize the policy statement and Chair Jerome Powell's remarks for further clues about the future path of monetary policy.

Geoff Yu at BNY argues that the Bank of England (BoE) is likely to keep policy unchanged despite energy-driven price pressures, as markets have already tightened financial conditions. He sees the United Kingdom's (UK) constrained fiscal space and potential tax-threshold relief as key for demand and gilt supply, judging current BoE tightening priced by markets as excessive but still supportive for British Pound (GBP) resilience.

BoE caution meets tight fiscal space

"The BoE is not expected to shift its policy stance this week despite renewed price pressures from energy. To paraphrase Governor Andrew Bailey’s views on transmission mechanisms, the market is already doing the tightening for them. Mortgage rates have already rebounded significantly due to the recent rise in swap rates, and even if tensions de-escalate, the reversal process is asymmetric and unlikely to be swift."

"In our view, the fiscal outlook will make a bigger difference to policy expectations. The new government has already launched several initiatives that reflect fiscal relief, with a major package due in early Q4. Reports point to raising tax thresholds as the main goal, helping offset the effects of fiscal drag in recent years."

"We believe current BoE pricing of around 42bp in tightening by year end looks excessive, but upside growth surprises can help with GBP resilience."

"The BoE is expected to hold rates at 3.75%, with at most two dissents. Although headline inflation risk has picked up, the Monetary Policy Committee is even more minded to focus on softer inflation. Governor Andrew Bailey continues to stress that wage growth is also slowing."

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• Gold kicks off the new week on a positive note as US-Iran diplomacy hopes undermine the US Dollar.
• Falling oil prices ease inflation fears and temper Fed rate hike bets, further benefiting the commodity.
• Traders seem hesitant as the market focus remains glued to this week’s crucial FOMC policy meeting.

Gold (XAU/USD) extends its consolidative price move through the first half of the European session on Monday and remains below the $4,100 mark as bulls seem hesitant ahead of the crucial FOMC meeting this week. Heading into the key central bank event, reviving hopes for a diplomatic resolution to end a five-month-old US-Iran war led to a steep fall in crude oil prices. This helps ease inflation fears and temper US Federal Reserve (Fed) rate hike expectations, which, in turn, is seen undermining the safe-haven US Dollar (USD) and lending some support to the non-yielding bullion.

The US paused its bombing campaign against Iran late on Friday, following 13 consecutive nights of strikes. US ambassador to the United Nations (UN) Mike Waltz said that while forces remained locked and loaded, President Donald Trump wants to give negotiations "a little bit of room". In response, a senior Iranian official told Reuters on Sunday that Tehran will halt its own ​attacks as long as the US does the same, fueling optimism about a lasting path to de-escalation of US-Iran tensions. This resulted in some unwinding of the geopolitical risk premium, which weighs heavily on the buck.

Moreover, the easing of hostilities dragged crude oil prices significantly lower and forced investors to trim their bets for an immediate interest rate hike by the US central bank. The outlook leads to a modest pullback in US Treasury bond yields, which turns out to be another factor that drags the USD away from the vicinity of the monthly high, retested last week. Traders, however, seem hesitant to place aggressive bearish bets on the USD and opt to wait for more cues about the Fed's policy path. Hence, the focus remains glued to the outcome of a two-day FOMC meeting on Wednesday.

Meanwhile, market participants remain skeptical about the halt in attacks. Adding to this, traffic through Bab el-Mandeb fell on July 26 after Iran-backed Houthis in Yemen attacked Saudi oil installations along the coast of the Red Sea. This adds to concerns about significant disruptions to global oil supplies due to the restricted transit through the Strait of Hormuz, which acts as a tailwind for crude oil prices. This helps limit deeper USD losses and keeps a lid on further upside for Gold, warranting some caution for aggressive bullish traders heading into the key central bank event risk.

XAU/USD daily chart

Gold might struggle to make it through short-term range amid mixed setup

The two-way price move since June 19 constitutes the formation of a rectangle on the daily chart. Against the backdrop of the recent breakdown below a technically significant 200-day Simple Moving Average (SMA), this might still be categorized as a bearish consolidation phase and keeps the longer-term downtrend in place.

Meanwhile, momentum indicators have improved, with the Relative Strength Index hovering just under the 50 line and the Moving Average Convergence Divergence (MACD) turning firmly positive. This, however, hints at a corrective rebound rather than a confirmed bullish reversal while price action is capped beneath the long-term average.

On the topside, the top boundary of the trading range near the $4,200 mark is the key resistance to beat. A daily close above this barrier would be needed to ease the broader bearish bias and open the door to a more sustainable advance to the 200-day SMA at $4,493.65. Until that occurs, rallies are likely to be viewed as corrective within the prevailing downtrend.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

MUFG’s Lee Hardman highlights that lower energy prices have eased pressure on Japanese policymakers and slowed USD/JPY’s climb below 164.00. Markets expect the Bank of Japan (BoJ) to keep rates unchanged but are focused on any hawkish signals on future hikes. Without clearer tightening guidance, the Japanese Yen (JPY) remains vulnerable, especially if the Federal Reserve (Fed) surprises hawkishly this week.

Yen vulnerable without BoJ hawkishness

"The drop in energy prices at the start of this week has brought some much-needed relief for Japanese policymakers and helped to slow upward momentum for USD/JPY which has held just below the 164.00-level since late last week."

"Bloomberg has reported that inflation concerns in Japan are having a negative impact on Prime Minister Takaichi’s popularity."

"Overall, the latest [poll] readings are still relatively high but do indicate that recent developments have had a negative impact. The government is currently considering whether to deliver a promised sales tax cut on food to help ease inflation pressures and aims to finalize its policy on the issue by early August."

"The BoJ are expected to leave rates on hold after hiking at the last meeting in June, but market participants will be watching closely to see if they provide any hawkish signals over future hikes."

"Bloomberg reported last week that the BoJ was open to a faster pace of rate hikes than every six months while adding that yen weakness was increasing upside inflation risks."

"Without hawkish guidance, the yen is vulnerable to further weakness especially if the Fed delivers a hawkish policy surprise this week."

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Brown Brothers Harriman’s (BBH) Elias Haddad sees above-target Australian inflation keeping Reserve Bank of Australia (RBA) hike risks alive, with June and Q2 Consumer Price Index (CPI) expected to show firm trimmed mean readings. However, Haddad judges risks skewed toward an extended pause given sub-potential growth and a cash rate near the top of neutral estimates, viewing this as a headwind for the Australian Dollar (AUD).

Inflation data and RBA guidance

"Headline CPI is expected at 4.0% y/y for a second straight month while trimmed mean CPI is expected at 3.7% y/y vs. 3.6% in May."

"The monthly CPI is Australia’s primary measure of inflation, but the RBA continues to focus on measures of underlying inflation from the quarterly CPI. Trimmed mean CPI is seen rising to a two-year high at 3.7% y/y in Q2 vs. 3.5% in Q1, keeping RBA rate hike bets live."

"Speeches by RBA Governor Michele Bullock (Tuesday) and Assistant Governor Sarah Hunter (Thursday) may provide some policy guidance ahead of the next RBA decision on August 11."

"RBA cash rate futures price-in 30% odds of a 25bps hike in August and fully price one to 4.60% by year end."

"In our view, the risk is skewed towards a more extended pause in the RBA tightening cycle which is a headwind for AUD: (i) RBA projects real GDP growth to be below potential over the next two years; (ii) RBA cash rate at 4.35% currently sits near the top of the range of model-based central estimates of the nominal neutral rate."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)