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Yen Falls Below 162 to a 40-Year Low as Rate Hikes Fail to Curb Carry Trades and Intervention Risks Rise

The yen’s depreciation has once again become a major focus in global foreign exchange markets. From late June to early July, USD/JPY once climbed above 162, touching around 162.84, a 40-year low and a level beyond the key range where Japan had previously intervened in the foreign exchange market. Although the Bank of Japan raised its policy rate to 1.0% on June 16, the highest level since 1995, the yen did not stop weakening. Instead, it continued to face depreciation pressure as the U.S.-Japan interest rate differential remained wide, carry trades persisted, and concerns over Japan’s fiscal outlook intensified. Read More at Datatrack The core reason behind the yen’s weakness still lies in the contradiction between monetary policy and fiscal policy. The Bank of Japan raised rates mainly because imported inflation pressure has been rising, as the weak yen pushes up the cost of imported energy, food, and raw materials, forcing the central bank to accelerate policy normalization. However, markets also expect the Federal Reserve to maintain a hawkish stance as inflation remains above target, making it difficult for the U.S.-Japan interest rate gap to narrow quickly. At the same time, the Takaichi cabinet’s continued expansionary fiscal stance has heightened investor concerns over Japan’s large public debt and long-term fiscal discipline, further weakening the yen’s appeal as a safe-haven currency. From the perspective of market positioning, the yen remains an important funding currency for global carry trades. Investors borrow low-yielding yen and shift funds into higher-yielding assets such as U.S. dollar assets, Indian equities, and the Turkish lira, keeping selling pressure on the yen. Even though the Japanese government spent about 11.73 trillion yen on foreign exchange intervention from late April to late May, briefly pulling the yen back toward the 155 level, the effect did not last. Recently, markets have even begun discussing tail risks of USD/JPY rising toward 170, 180, or even 200. However, 200 is not the base-case scenario; it would require several conditions to occur simultaneously, including a more hawkish Fed, another surge in oil prices, worsening confidence in Japan’s fiscal position, and ineffective official intervention. The impact of yen depreciation on Japan’s economy is clearly divided. On one hand, a weaker yen supports earnings for export-oriented companies and has helped lift the Nikkei index to elevated levels, with external-demand sectors such as semiconductors, machinery, and automobiles benefiting significantly. Japan’s exports rose 17.0% year over year in May, while overseas machinery orders also remained at a high growth rate, reflecting continued support for Japan’s manufacturing sector from the AI supply chain and global capital expenditure demand. On the other hand, yen depreciation pushes up import costs, with price pressures spreading across food, energy, and electricity. This weighs on Japanese households’ real purchasing power and consumer confidence, while also raising political risks for the government as it faces rising living-cost inflation. Looking ahead, markets will focus on three key areas over the coming months. First, if USD/JPY stays firmly above 162 and tests the 164 to 165 range, the probability of renewed intervention by the Japanese government will rise. Second, if the Federal Reserve keeps interest rates high while the Bank of Japan raises rates only gradually, the U.S.-Japan interest rate differential will continue to support short-yen trades. Third, if yen depreciation further fuels imported inflation, the Bank of Japan will face an even more difficult policy trade-off. In the short term, official intervention may slow the pace of yen depreciation. However, if interest rate differentials, fiscal concerns, and energy import pressures do not improve, the weak-yen trend will remain difficult to fundamentally reverse.

Warsh Cancels Forward Guidance as the Fed Enters an Era of “Less Talking, More Flexibility”

The U.S. Federal Reserve is entering a new era of policy communication. Kevin Warsh chaired his first FOMC meeting in June after taking over as the new Fed chair. While the rate decision itself was not surprising, with the federal funds target range remaining at 3.50% to 3.75%, the real change lies in how the Fed communicates with the market. The June post-meeting statement was significantly shortened, removing language that previously hinted at the future policy path. Warsh also did not submit his own dot plot projection, and at the Sintra central banking forum in Portugal in July, he reiterated that he would not signal in advance whether the Fed would raise rates at the end-July meeting. Warsh believes that inflation, energy prices, AI investment, labor market structure, and geopolitical conditions are all changing rapidly. In such an environment, committing to a policy direction too early through forward guidance could tie the Fed’s hands and make markets overly dependent on the central bank for answers. The Fed still released the Summary of Economic Projections and the dot plot in June, but Warsh himself did not submit his own rate projection. This reflected his reservations about the dot plot and reduced the market’s ability to infer the policy path from the chair’s personal forecast. In the short term, markets can still refer to officials’ rate projections, but the dot plot should be understood more as a real-time distribution of policy preferences rather than a Fed commitment to future interest rates. Warsh’s new framework can be summarized as “less talking, more flexibility.” By refusing to provide hints about the next policy move, he allows the FOMC to retain room to adjust meeting by meeting. At the Sintra forum, Warsh made clear that prices in the U.S. remain too high, and that anyone expecting the Fed to tolerate inflation above its 2% target would be disappointed. However, he also noted that inflation expectations and related risks had eased in recent weeks, mainly due to the decline in oil prices following the U.S.-Iran ceasefire. In other words, Warsh wants policy judgment to return to the data itself. This also means that market pricing will change. In the past, investors could look to Fed statements and the chair’s press conferences for clues about the next meeting. Going forward, markets will rely more on CPI, PCE, nonfarm payrolls, wages, inflation expectations, oil prices, and interest rate futures to form their own judgments. For rate-sensitive assets such as high-valuation technology stocks, long-term U.S. Treasuries, the U.S. dollar, and gold, each inflation or employment data release could trigger larger repricing. Looking ahead, the FOMC meeting at the end of July will be the first key test of Warsh’s new communication model. If June inflation data confirm that price pressures are easing after the decline in oil prices, the probability of the Fed keeping rates unchanged will rise. However, if employment and core inflation remain resilient, market expectations for a rate hike later this year could strengthen again. Warsh’s cancellation of forward guidance marks the Fed’s shift toward allowing markets to price policy on their own, making the future policy path more directly dependent on incoming data.

U.S.-Iran Ceasefire Drives Oil Prices Lower as Signs of a U.S. Inflation Peak Emerge

The U.S.-Iran ceasefire and subsequent progress in negotiations are rapidly reshaping the pricing logic of the crude oil market. Since mid-June, as the U.S. and Iran signed a ceasefire-related memorandum of understanding and began talks on restoring shipping through the Strait of Hormuz, the Middle East war premium that had accumulated in the market has clearly faded. International oil prices have largely returned to pre-war levels, while June saw one of the rarest monthly declines since the pandemic. As U.S.-Iran talks in Doha showed positive progress, Brent crude fell to USD 70.84 per barrel during intraday trading on July 2, while WTI crude dropped to USD 67.75, with both benchmarks extending their recent downtrend. This decline in oil prices is crucial for the U.S. inflation outlook. U.S. CPI rose 4.2% year over year in May, with energy prices serving as a major driver of inflation and prompting markets to reprice the risk of Fed rate hikes in the second half of the year. However, as oil prices have quickly fallen from wartime highs to around USD 70, upward pressure from gasoline and energy costs on CPI and PCE is expected to gradually ease. If oil prices remain in the current range, May could very likely mark the inflation peak of this round of geopolitical shock, while the urgency for the Fed to resume rate hikes would also be significantly lower than before the June meeting. Read More at Datatrack Still, current market pricing reflects an optimistic scenario of an extended ceasefire, restored shipping, and normalized supply, while the repair of physical supply chains will take time. Although shipping through the Strait of Hormuz is gradually resuming, risks related to mines, shipping insurance costs, designated shipping routes, and vessel safety assessments will continue to limit the speed of recovery. Iran has also recently insisted on retaining influence over traffic management in the Strait of Hormuz, and may even seek to strengthen control through fees or route restrictions in the future. This makes it difficult for markets to fully price out the Middle East risk premium. From a supply-demand perspective, low inventories and restocking demand may also limit further downside in oil prices. During the earlier Middle East conflict, some countries stabilized energy supply by releasing commercial inventories and strategic reserves. Now that oil prices have fallen, importers and refiners may instead restart restocking. This means that although oil prices are under pressure in the short term from the fading war premium, they may still find support at lower levels if restocking demand rises, OPEC+ increases output by less than expected, or another security incident occurs in the Strait of Hormuz. Looking ahead, oil prices will remain a core variable in determining whether U.S. inflation has truly peaked. If the Doha talks continue to advance and the normalization of Persian Gulf crude oil and LNG exports is confirmed, energy prices will help lower inflation readings after June and expand the Fed’s room to keep rates unchanged. However, the U.S.-Iran ceasefire has only shifted crude oil pricing from a “wartime supply shock” back toward supply-demand fundamentals; it does not mean inflationary pressure has fully disappeared. Markets still need to watch three key risks: whether U.S.-Iran talks can move from a temporary ceasefire to a more stable agreement; whether traffic through the Strait of Hormuz can truly return to pre-war levels; and whether global restocking demand under low inventory conditions pushes oil prices higher again. For the Fed, lower oil prices provide temporary breathing room. For markets, the real question is whether energy prices can remain stably low, rather than merely giving back the war premium temporarily.

Resurgent Inflation Puts the Fed Back on a Hawkish Path

Gold fell below the $4,000 mark on June 24 for the first time since November 2025, retreating more than 25% from its all-time high of $5,589 reached in late January. This is not a routine pullback but the convergence of two structural reversals. First, new Fed Chair Kevin Warsh's inaugural FOMC meeting delivered an unmistakably hawkish signal — the updated dot plot showed most committee members expecting at least one rate hike this year, driving the US dollar to a 13-month high. Second, the Israel-Iran ceasefire agreement has materially reduced geopolitical uncertainty, unwinding much of the war-risk premium embedded in gold since the conflict erupted earlier in the year. Together, these forces leave gold facing a materially more difficult near-term environment than at any point in 2026. The structural pressure stems from a dual tightening of real rates and dollar strength. Since May CPI printed at 4.2%, market expectations for Fed tightening have accelerated sharply — September is now viewed as a live meeting for a potential hike, with an 80%-plus probability of at least one increase by year-end. A stronger dollar directly raises the cost of gold for non-dollar buyers while lifting the opportunity cost of holding a non-yielding asset. The unwinding of Middle East geopolitical risk removes a second pillar of support that had anchored prices for much of the past six months. Market views diverge at this juncture: while near-term sentiment is bearish, Goldman Sachs and Deutsche Bank both maintain year-end targets of $4,600 to $4,900 per ounce, arguing that central bank de-dollarization buying remains a structural demand force that short-term rate moves have not dislodged. Looking ahead, $4,000 serves as both a technical and psychological line in the sand. Should it fail to hold, markets anticipate the next key support zone near $3,800 — a level that aligns with a scenario in which the Fed delivers three to four rate hikes. Over the medium term, if inflation retreats meaningfully before year-end and the tightening cycle remains modest, the downside for gold appears manageable, and institutional year-end targets retain their relevance. The tail risk profile is asymmetric: to the upside, a renewed geopolitical escalation or large-scale accumulation by emerging market central banks could reignite the rally; to the downside, an aggressive Fed tightening path combined with a persistently strong dollar poses the sharpest threat.

Resurgent Inflation Puts the Fed Back on a Hawkish Path

When markets had broadly priced in a Federal Reserve pivot toward rate cuts, the June 17, 2026 FOMC decision delivered a strikingly different signal: inflation is not fading—it is accelerating back. In new Chair Kevin Warsh's first policy meeting, the Federal Reserve unanimously held the federal funds rate steady at 3.50%–3.75%. But the more consequential development was buried in the updated dot plot: nine of nineteen officials now anticipate at least one rate increase before year-end, up from zero just three months ago. Since the Fed launched its easing cycle in late 2024, this marks the sharpest hawkish inflection point yet—a potential pivot away from the pivot. The primary engine behind this inflation resurgence is energy-driven cost pressure stemming from the U.S.-Iran conflict. Officials sharply revised their 2026 inflation projections, lifting the Personal Consumption Expenditures (PCE) price index forecast to 3.6% on a year-over-year basis from 2.7% in March, with core PCE revised up to 3.3%—both running well above the Fed's 2% target. Notably, Warsh himself declined to publish a personal rate forecast and announced task forces to overhaul major Fed operations, signaling a leadership approach that prizes policy optionality over forward guidance. Markets are divided: some analysts believe that if the Iran ceasefire holds and energy prices continue retreating, inflation will naturally cool in the second half of the year; others warn that wage stickiness and persistent services inflation make a genuine rate hike increasingly unavoidable. In the near term, markets face the challenge of repricing the tension between rising rate hike expectations and the disinflationary tailwind from falling oil prices following the Iran deal. Should inflation data from June through September continue to surprise to the upside, the September FOMC meeting could become the first live hike under Warsh's tenure. Over a six-to-twelve-month horizon, any genuine return to rate increases would fundamentally reprice fixed income markets and add meaningful pressure on high-valuation equities. The key tail risk: if U.S.-Iran negotiations unravel and conflict re-escalates, a second wave of energy inflation could place the Fed in a far more acute policy dilemma—forced to simultaneously contain inflation and cushion a growth slowdown, with limited room to maneuver on either front.