USD/JPY is back near pre-payrolls levels after a volatile session on Friday. The pair tumbled from 158.30 to approximately 156.70 in the wake of a soft US July employment report before staging a modest recovery. It closed Friday around 157.75 and has since climbed back toward the 158.20 level.

The catalyst for the dollar sell-off was the July non-farm payrolls figure, which came in at -23,000 against an expected +80,000. However, the headline number was heavily influenced by a sharp decline in government employment. As noted ahead of the release:

"Some analysts are pointing to potential for a modest drag from government payrolls this month. This comes after an uptick in government hiring in May — linked to poll worker hiring for primary elections — with some retention seen during June."

Leisure and hospitality jobs also declined for a second consecutive month, with no boost from the World Cup. The unemployment rate did tick lower, though that was accompanied by a slight dip in the participation rate. Cooling wage pressures added to the dovish read, prompting markets to pare back Federal Reserve rate-hike pricing for September.

The payrolls data reaffirms a broader softening trend in the US labour market that has persisted for some time. While the report does not signal a material deterioration in conditions, it also does not indicate the kind of overheating that would necessitate imminent rate increases. This dynamic keeps the Federal Reserve focused on its inflation battle, making the upcoming July CPI release the week's key event for markets. At this juncture, anything short of a hot inflation print is likely to further reduce the odds of a September rate hike, which could limit dollar upside.

On the yen side, the structural outlook remains subdued despite a recent joint intervention move. The Bank of Japan's continued adherence to ultra-loose monetary policy — in contrast to the Federal Reserve's tightening cycle — sustains the wide US-Japan interest rate differential that has been the primary driver of the yen's depreciation this year. Traders are not yet convinced that the intervention will be sufficient to change the fundamental trajectory of the Japanese currency while that policy gap persists. US 10-year Treasury yields continue to settle at elevated levels, standing at 4.655% today and hovering near the key 4.70% threshold, even after last week's softer jobs data.

Geopolitical risks continue to loom over broader markets. The US-Iran conflict persists with no firm timeline or certainty on when the Strait of Hormuz might reopen. Even in the event of an Iran-Oman agreement, the meaning of "reopening" remains ambiguous — it would not represent a return to pre-war conditions. Whether the situation improves upon late-June conditions or deteriorates further remains an open question, keeping oil prices positioned for potential volatility.

For USD/JPY, the balance of risks remains tilted to the upside so long as the US-Iran conflict persists. However, joint intervention risks are expected to cap gains near the 160 level, a threshold that has drawn official action before and remains a focal point for traders monitoring yen weakness. Downside scenarios would require both a significant cooling of US price pressures in this week's CPI data and a more positive turn in Middle East developments. Under such conditions, a retreat toward the 155–156 region could emerge, where dip buying is widely anticipated.