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- Yen to benefit on further Middle East tensions

- USD/JPY outlook now negative

- Expect geopolitics to remain in control of markets

The Japanese Yen is expected to outperform other currencies on a material escalation in tensions between the U.S. and Iran, says Chris Turner, Global Head of Strategy and Head of EMEA and LATAM Research at ING Bank.

"Were events in the Middle East to escalate severely, overweight positioning in risk assets could easily trigger a 7-10% correction in global equity markets," says Turner.

A shift out of global stocks is in turn tipped to benefit the Yen:

"The Japanese Yen should once again outperform - especially against those risk-sensitive currencies directly exposed to oil exports via the Straits of Hormuz, i.e. the Korean won and the Indian rupee," says Turner.

Global stock markets and commodities were sent into a decline on Friday, January 03 after the U.S. killed senior Iranian military commander Qasem Soleimani and sparked a spike in tensions in the Middle East.

"The U.S. air attacks on Iran have triggered a flight to "safe havens" in the currency market. USD and JPY are benefiting, whereas the EUR, but especially EM currencies are the losers. There is no need to look for fundamental reasons. The reflex of the currency market is to do what has worked in similar situations in the past," says Ulrich Leuchtmann, Head of FX & Commodity Research at Commerzbank.

Global financial markets are likely to remain nervous as Iran has vowed to avenge the death, while U.S. President Donald Trump has in turn stated the U.S. is ready to hit 52 Iranian targets in response to any subsequent Iranian retaliation.

The conditions for an escalation in geopolitical tensions are therefore in place and the Japanese Yen stands to benefit, it would appear.

"Unfortunately, the new decade has kick started with an escalation in US-Iran tensions, which has triggered risk-off market conditions. Geopolitics will therefore remain in the spotlight for the foreseeable future," says George Vessey, Currency Strategist at Western Union.

The Pound-to-Yen exchange rate has pulled lower to 141.63 at the time of writing as a broader period of consolidation extends. The decline in GBP/JPY comes as the Conservative win in December is now fully absorbed by Sterling, but some of the recent declines in the exchange rate will certainly be due to safe-haven demand for the Yen.

Expect The Pound-to-Yen exchange rate to remain under pressure should the geopolitical environment remain tense.

The Yen's recent strength is also clearly evident in the headline Dollar-Yen exchange rate, where we see the Dollar yielding ground:

The USD/JPY exchange rate has been in a broad rally since August of 2019, but the above chart suggests that of late the trend has faded, and the Yen is starting to regain the initiative.

"USD/JPY’s outlook is negative following the failure at the end of last year at the 2018-2020 downtrend at 109.55. It has sold off to the 107.89 November low, which has so far held on a closing basis. This guards the 106.48 October low and eventually the 105.00 region," says Karen Jones, Team Head of FICC Technical Analysis Research at Commerzbank.

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