Iran Truce, BOJ Rate Hike Fuel Risk-On; Yen Stays Weak

Peace hopes sparked a relief rally. Reports that the US and Iran had electronically signed an interim peace agreement, with a formal signing expected Friday, sent Brent crude 4% lower on Monday. WTI tested $80 a barrel. US equities rose across the board. Technology and consumer discretionary sectors led the gains, with industrials close behind. SpaceX shares gained another 20% on their second trading day.

The oil drop brings Brent close to its 200-day moving average near $80. Lower oil prices reduce global inflation pressure and the import bill for countries like Japan. The yen should have benefited. It did not. The broader risk-on mood pushed capital toward higher-yielding currencies instead.

The Bank of Japan raised its policy rate to 1% overnight in a 7-1 vote, a widely expected move. The sole dissenter, Toichiro Asada, argued that downside risks to output and employment from Middle East disruption outweighed the case for tightening on inflation grounds. The decision did little for the yen. USD/JPY continued to trade above 160, a level that triggered intervention in April and May 2024. Traders saw no official pushback this time.

The 25-basis-point move was fully priced. Money markets had assigned roughly 90% probability to a hike of that size. The BOJ's accompanying statement offered no hawkish guidance on the pace of further tightening. Asada's dissent reflects a view shared by some private-sector economists. If the board's internal debate shifts toward that camp, normalisation could slow, traders said.

For yen traders, the rate differential remains wide. The BOJ at 1%, the Fed at 4.25-4.50%, keeps the yen-funded carry trade alive. A sustained break below 160 would need either a BOJ signal that 1.25% or 1.50% is coming soon, or a sharp drop in US yields. Neither is on the table today, traders said.

The Reserve Bank of Australia left its cash rate at 4.35% overnight, a unanimous decision. GDP growth has slowed and unemployment is rising, supporting the case for a pause. Headline inflation has eased but remains above the target band. The Aussie dipped modestly on the announcement then recovered. AUD/USD held near 0.6650, a level that has acted as support and resistance multiple times since April.

Wednesday brings two key events. UK May CPI prints at 6 a.m. GMT. Economists expect headline and core year-over-year to reach 3% and 2.7%, respectively, up from 2.8% and 2.5% in April. Money markets price about 30 basis points of Bank of England tightening by year-end.

If inflation holds or comes in lower, that hawkish pricing could unwind. The market is already pricing more tightening than the BOE's own projections imply. A soft CPI print would hit GBP/USD, which has been supported by rate expectations rather than growth momentum. UK GDP has shown little life. Unemployment is trending higher. The jobs market is softening.

The Fed rate decision lands at 6 p.m. GMT. Markets expect a hold at 4.25-4.50%. The dot plot and Powell's press conference will set the tone for the dollar into Thursday's Asian session.

The UK CPI print arrives at 6 a.m. GMT. The Fed decision 12 hours later. Both will determine whether the risk-on mood extends or reverses.