The dollar-yen pair is currently in a state of price turbulence, reacting impulsively to the ongoing flow of information. The contradictory fundamental background makes it difficult for USD/JPY traders to ascertain the direction of price movement. For instance, the results of the March Bank of Japan meeting supported the yen, but Donald Trump's ultimatum regarding Iran bolstered the greenback's position.

The events have left market participants bewildered: first, Trump announced "productive negotiations" with Tehran (while extending the deadline of his ultimatum), and then Iran contradicted the very existence of these negotiations.

In other words, the news cycle is changing at a kaleidoscopic pace, making it difficult to speak of a sustainable movement in USD/JPY either upward or downward at this moment. Moreover, this riddle will become even more complex on Tuesday, as key inflation growth data will be released in Japan.

Before we proceed, let's briefly review the results of the March Bank of Japan meeting, announced last Thursday. Although the central bank maintained all monetary policy parameters unchanged, the market interpreted the March meeting outcome as positive for the yen.

First, the decision to keep the status quo was not unanimous: Board member Hajime Takata voted for an immediate increase in the interest rate to 1.0%, arguing for preemptive action to avoid an uncontrolled spiral of "wages-prices."

Second, the Bank of Japan forecasted an acceleration in inflation, describing the current decline in inflation indicators as a "temporary phenomenon." According to the central bank, the effect of government energy subsidies will soon wane, and price pressures will intensify.

This is an important remark given the dynamics of key inflation indicators. According to the latest data, overall inflation in Japan has slowed to a two-year low, specifically to 1.5%. As mentioned earlier, this is related to the government's subsidies for electricity and gas, as well as the high base effect. The core CPI, excluding fresh food prices, has remained steady at 2.0%. At the same time, the TCPI (Tokyo Consumer Price Index), a leading indicator of inflation nationwide, has dropped to 1.8%, confirming the trend of cooling prices.

Given such clear dynamics in inflation indicators, traders were expecting softer remarks of a wait-and-see nature from the central bank. However, the Bank of Japan has focused on inflation risks, stating that it is ready to respond "swiftly and flexibly to new inflation data." Overall, the central bank clearly indicated that a rate hike could occur in the coming months if inflationary pressures remain persistent. Additionally, the Bank noted positive results from the spring negotiations between unions and employers ("shunto"), during which many companies agreed to raise wages by over 5% (this trend has continued for the third consecutive year). Again, this is one of the conditions for sustainable inflation.

In this context, the report on Japan's CPI growth for February could prompt significant volatility (in favor of the yen) if it comes in the "green zone." According to preliminary forecasts, the overall consumer price index is expected to remain at last month's level, which is 1.5% year-on-year. The core index, excluding fresh food prices, is expected to drop to 1.7%, down from 2.0%. This is a key signal, as this inflation indicator is particularly closely monitored by the central bank. If the core CPI holds at 2.0% or demonstrates upward dynamics, it will strengthen the position of the "hawks" within the central bank, especially in light of March events.

Nevertheless, today the tone of trading is set by geopolitics. The events have not favored the American currency, as the financial world has seen "the first signs of de-escalation." After his 48-hour ultimatum, Donald Trump announced a delay of possible strikes on Iran's energy infrastructure by five days, calling the current contacts with Tehran "very productive."

However, according to Iranian media, there have been no negotiations between Iran and the US whatsoever, and the head of the White House is allegedly "trying to buy time." Officially, Tehran responded somewhat softly but also did not confirm the existence of any negotiations. Iran stated that it "is not the party that initiated this conflict," so all regional initiatives to reduce tension should be directed at Washington, as US actions are the root cause of the crisis."

Still, despite such detached comments from Tehran, markets reacted positively to the situation. Oil prices instantly plummeted 7% (Brent dropped from $110 to $96-103), and the dollar index fell to the 98 level. The USD/JPY pair also declined—not only due to the weakening of the greenback but also to the falling oil market (since Japan imports nearly 100% of its energy).

All of this indicates that the market reacted to Trump's words as a real step towards de-escalation, while ignoring Iran's hawkish rhetoric. Moreover, insider news is emerging that the US and Iran are preparing to meet in Islamabad later this week (as reported by Axios, citing an Israeli official).

In other words, the market is currently playing out Washington's "diplomatic optimism," but risks of further escalation remain if rumors of negotiations are not confirmed.

In such uncertainty, maintaining a wait-and-see position on the USD/JPY pair seems prudent—traders are reacting too sharply to escalation/de-escalation signals, while in the current circumstances, the balance could tip either way.