The USDJPY pair failed to capitalize on rising short-term yields and was down 0.3% during the US session, trading at around 113.60. Market participants paid attention to Jerome Powell's remarks.
In his speech, Fed Chair Powell reiterated that inflation is well above target, and the taper is on track to begin soon. It should end by mid-2022. However, he did note that "it's time to taper... not time to raise rates..."
Nevertheless, markets are looking through that and are pricing in an increasingly hawkish Fed. As a result, traders are pricing in a 70% chance of rate-hike by June 2022, almost 1.5 rate-hikes by Sept 2022, and notably more than two rate-hikes by Dec 2022.
Short-term US yields rose sharply after his comments, sending stocks and bonds strongly lower. The 2-year yield soared toward 0.5%. However, the 10-year tumbled back toward 1.6%, flattening the yield curve strongly.
Therefore, traders expect a slowdown in the US economic activity due to rising short-term rates, prompting safe-haven buying in long-term US bonds.
The long-term chart still looks bullish for the currency pair, and it needs to stay above 112 for that view to remain intact. On the upside, a breakout above this week's highs of 114.60 is required to confirm the bullish bias.
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