Yen and Aussie Dollar on Edge: Inflation Surge and Middle East Crisis Shift Market Outlook

Japan’s core inflation surprise and China’s rate policy hold sway over JPY and AUD trajectories, while escalating Middle East tensions inject fresh volatility into both USD/JPY and AUD/USD pairs.

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🔍 Japanese Yen Outlook: Core Inflation Spike Fuels Rate Hike Talk

The Japanese Yen (JPY) remains under pressure despite a spike in core inflation, as traders reassess the Bank of Japan’s (BoJ) interest rate path. Core CPI jumped to 3.7% in May, sparking speculation that the BoJ might end its ultra-loose stance by Q4 2025.

Although headline inflation cooled slightly to 3.5%, the rise in underlying inflation (ex-food and energy) to 3.3% aligns with BoJ Governor Kazuo Ueda’s warning: sustained high food and oil prices—especially amid the Iran-Israel conflict—could stoke long-term inflation expectations.

🗣️ “If tensions in the Middle East persist, they could impact inflation expectations,” said Ueda, hinting at a more cautious policy stance.

A Reuters poll revealed shifting market expectations—while most still expect rates to hold at 0.5% through 2025, over 75% of economists now eye a potential hike by Q1 2026. USD/JPY slightly dipped to 145.14, reflecting investor hesitation.

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📈 USD/JPY Technical View: Eyes on 146 or Retreat to 142?

• Bullish scenario: If US data impresses and BoJ stays dovish, USD/JPY may test 146.00, targeting the May 29 high (146.285).
• Bearish scenario: Escalation in Iran or strong BoJ signals could drive a drop toward 142.50.

Today’s Focus: Watch the Philadelphia Fed Manufacturing Index. A strong print could boost USD demand and lift the pair; a weak result may raise hopes of Fed cuts, pressuring the greenback.

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🦘 Aussie Dollar in the Spotlight: China, Conflict, and RBA Cues at Play

The Australian Dollar (AUD) is caught in a tug-of-war between external trade risks and local policy uncertainty. All eyes are on China’s PBoC, with markets expecting no change in Loan Prime Rates (3.0% for 1-year, 3.5% for 5-year) on June 20.

However, a surprise rate cut from China could boost commodity demand, indirectly supporting AUD due to Australia’s deep trade links. At the same time, Middle East tensions could drag on risk sentiment, possibly pulling AUD/USD back toward $0.6445.

📉 RBA Governor Michele Bullock warned of trade war spillovers, noting that worsening US-China relations may force the RBA to adjust its rate path.

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📊 AUD/USD Key Scenarios:

• Bullish: A ceasefire, supportive Chinese policy, or hawkish RBA signals may lift AUD/USD to $0.6550–$0.6552 (June 16 high).
• Bearish: Escalating Middle East tensions or weak Chinese data could sink the pair to $0.6450.

Technical Bias: The daily chart signals a bullish tilt, but caution is warranted if price breaks below the 50-day EMA.

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🗓️ What to Watch Next

• USD/JPY: BoJ policy tone, US inflation and trade headlines.
• AUD/USD: China’s PBoC moves, US manufacturing data, and Iran-Israel headlines.
• Both pairs: Shifting global risk appetite amid geopolitical tensions.

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