USD/JPY continues to flirt with intervention zone for now

The currency pair continues to keep above the 160.00 mark so far in trading this week but is not really running away for now. Traders are reserving some caution in not wanting to incur the wrath of Japan's ministry of finance.

As price action keeps above the key psychological level, we have effectively erased the drop from the initial intervention point at the end of April. Easy come, easy go.

At its best, the intervention move by Tokyo sent the pair down roughly 500 pips and we have recovered all of that already.

It's a damning message to Japan's ministry of finance and it speaks volumes about the yen currency outlook at this point.

So, what's next?

At this stage, I would argue that traders are waiting on the next big catalyst for another push higher. At the end of last week, we got the hot US jobs report and that was enough to give buyers some courage to punch through the 160.00 level.

However, there is still a sense that if price movement goes too far, too fast that Tokyo officials will decide to step into the market. Hence, that is making for a more tentative mood in chasing a stronger breakout above 160.00.

That being said, the US CPI report later today could present another opportunity. If risk conditions sour further amid a hot set of inflation numbers, that could give buyers another round of ammunition to work with in pushing for stronger gains.

But again, it will come at the risk of Japan's ministry of finance deciding to intervene in the market. At this point, it's all a psychological game when it comes to USD/JPY.

Despite all of the above, there is also a possible consideration that Japan may not act until after the BOJ decision next week. The central bank is widely expected to raise its policy rate by 25 bps to 1% on 16 June. The hope is that a more hawkish take could help to provide some comfort for the yen currency.

But if that fails, I reckon that the ministry of finance will have to start to draw a line somewhere. Otherwise, traders will continue to push USD/JPY to the limit in testing their intervention constraints.

It's a tricky game for Tokyo officials, not least with the Middle East conflict continuing to drag on for longer. That just serves to keep their hands tied in trying to be more bold in taking action. And I don't mean just the ministry of finance, but the BOJ as well.