• A combination of factors pushed USD/JPY to its highest level since October 1998 on Tuesday.
  • The Fed-BoJ policy divergence drove flows away from the JPY and a goodish lift to the major.
  • Recession fears drove haven flows towards the JPY and prompted some selling on Wednesday.
  • The downside seems limited amid modest USD strength and ahead of Fed Powell’s testimony.

The Japanese yen has been the worst-performing major currency since March amid a big divergence in the monetary policy stance adopted by the Bank of Japan and other major central banks. The BoJ signalled last Friday that it would stick to its ultra-accommodative policy and reiterated its guidance to keep borrowing costs at "present or lower" levels. The Japanese central bank also pledged to guide the 10-year yield around 0% and intervene to keep rates from moving higher. The BoJ Governor Haruhiko Kuroda has defended the policy as critical to support the fragile economy and push inflation higher.

Adding to this, minutes from the latest BoJ policy meeting released this Wednesday revealed that board members agreed on taking additional easing steps without hesitation if needed. In contrast, the Federal Reserve is expected to retain its aggressive policy tightening stance to curb soaring inflation. The bets were reaffirmed by Fed Governor Christopher Waller's comments on Sunday, saying that he was open to another rate hike of 75 bps in July. Moreover, the Fed's dot plot showed that the median projection for the federal funds rate stood at 3.4% for 2022 and 3.8% in 2023.

A more hawkish Fed outlook remained supportive of elevated US Treasury bond yields, which resulted in a further widening of the US-Japan interest rate differential. This, along with the overnight rally in the equity markets, weighed heavily on the safe-haven Japanese yen. Apart from this, the emergence of some US dollar dip-buying provided a goodish lift to the USD/JPY pair and pushed spot prices to the highest level since October 1998, around the 136.70 region. That said, a combination of factors capped the upside for the major and prompted some selling during the Asian session on Wednesday.

The overnight optimism fizzled out rather quickly amid concerns that a more aggressive move by major central banks to combat stubbornly high inflation would pose challenges to the global economic growth. This led to a fresh leg down in the equity markets and drove some haven flows towards the JPY. The anti-risk flow was reinforced by a modest pullback in the US bond yields, which further inspired bearish traders and exerted some downward pressure on the USD/JPY pair. The downside, however, seems limited, at least for the time being, amid the underlying bullish sentiment surrounding the greenback.

Investors might also refrain from placing aggressive bets ahead of Fed Chair Jerome Powell's semi-annual testimony before the Senate Banking Committee, due later during the North American session. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to the USD/JPY pair. Traders will further take cues from the broader market risk sentiment to grab short-term opportunities around the major.

Technical outlook

From a technical perspective, the overnight strong move-up confirmed a fresh bullish breakout through a double-top resistance near the 135.50-135.60 supply zone. The subsequent move up, however, stalled near a two-week-old ascending trend-line resistance, which should now act as a key pivotal point. Meanwhile, the occurrence of bearish RSI divergence on the daily chart supports prospects for some meaningful corrective pullback. Hence, a slide back towards testing the 135.50-135.60 resistance breakpoint, now turned support, now looks like a distinct possibility.

Some follow-through selling might expose the 135.00 psychological mark, below which the USD/JPY pair could drop to the 134.30-134.20 horizontal support. This is closely followed by the 134.00 round-figure mark. A convincing breakthrough the latter could prompt aggressive long-unwinding trade and pave the way for a deeper correction, towards the 133.00 round-figure mark.

On the flip side, the aforementioned ascending trend-line, currently around the 136.70 region, might continue to act as immediate strong resistance. Sustained strength above would be seen as a fresh trigger for bullish traders. Some follow-through buying beyond the 137.00 round-figure mark would reaffirm the constructive outlook and pave the way for an extension of the recent strong uptrend witnessed since early March. 

fxsoriginal

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news Join Telegram

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD recovers above 1.0450 as USD slips ahead of US inflation

EUR/USD recovers above 1.0450 as USD slips ahead of US inflation

EUR/USD is trading above 1.0450, displaying a modest rebound on a minor pullback in the US dollar. The US Treasury yields rebound amid cautious optimism, ahead of PCE inflation. The US Core PCE Price Index is seen easing to 4.7% YoY in May. 

EUR/USD News

GBP/USD advances towards 1.2150 amid USD retreat, US data eyed

GBP/USD advances towards 1.2150 amid USD retreat, US data eyed

GBP/USD is advancing towards 1.2150 amid a broad US dollar retreat, despite a mixed market mood. BOE's Bailey said the UK economy is facing a very large real income shock. UK data and US PCE inflation awaited. 

GBP/USD News

Gold seems vulnerable near two-week low, eyes US PCE inflation data

Gold seems vulnerable near two-week low, eyes US PCE inflation data

Gold traded with a mild negative bias for the fourth successive day on Thursday and languished near a two-week low touched the previous day. The XAUUSD was last seen hovering around the $1,816 region and was pressured by the prospects for more aggressive rate hikes by the Fed.

Gold News

Breaking: Bitcoin price drops below $19,000

Breaking: Bitcoin price drops below $19,000

Bitcoin price has breached a critical area of support over the past few hours, dipping below $19,000. Transaction history shows that a large number of addresses acquired BTC above $20,000. 

Read more

FXStreet Premium users exceed expectations

FXStreet Premium users exceed expectations

Tap into our 20 years Forex trading experience and get ahead of the markets. Maximize our actionable content, be part of our community, and chat with our experts. Join FXStreet Premium today!

BECOME PREMIUM

Majors

Cryptocurrencies

Signatures