USD/JPY risk-rally is sensitive to fresh Baghdad-noise, markets on alert

• USD/JPY rallies in US session in recovery risk-rally following Trump's address od de-escalation.
• USD/JPY pulls back from risk-on highs on further reports of unrest in Baghdad.

USD/JPY is starting out in Tokyo steady on the 109 handle between 109.01 and 109.12 at the time of writing, consolidating the risk-on rally that ensued overnight following Trump's de-escalating address over the US/Iran crisis. 

USD/JPY recovered from the 107.65 lows on news of Iran’s missile attack but rallied to 108.45 by the London morning and higher in the US session to a high of 109.20 by the New York afternoon. There were already signs emerging from Tehran of de-escalation prior to Trump's response and as such, markets took a pause on the risk-off and considered that there may not be retaliation from the US. 

There had been no reports of US casualties, but more of a calculated need to do something without creating he grounds for out-right war.  In the US session, President Donald Trump then addressed the US and said that Iran “appeared to be standing down”. Rather than announce any additional military action, he said he was imposing fresh sanctions on Iran. Risk rallied again and yields rallied, supporting the US dollar.

Further reports of unrest in Baghdad.

However, in more recent trade, air raid sirens are reportedly coming from the US embassy and explosion that sounded like rocket landing in the Baghdad green zone. Markets are on high alert and the yen picked up a slight bid. 

• Reports of rockets hitting Iraqi green-zone – Developing story

US yields rally in US session

"10yr yields rebounded from 1.70% to 1.87% (was 1.79% at the Sydney close). There was a small dip back in the Sydney morning though on headlines reporting rockets being fired at the US “green zone” in Baghdad," analysts at Westpac noted, adding, "markets are pricing a near-zero chance of easing at the next Fed meeting on 29 January but a terminal rate of 1.25% (vs Fed’s mid-rate at 1.63% currently)." As for US data, the analysts noted that the US Dec ADP private payrolls beat estimates with a jobs gain of 202k (est. 160k), and Nov was revised higher to 124k (from 67k), bringing it closer to the official data.

USD/JPY levels