USD/JPY extends past 114.00 buoyed by higher US yields

The dollar has regained bullish traction on Friday and is rallying nearly 0.5% so far today, erasing the previous two days’ losses. The USD/JPY is testing levels above 114.00 at the time of writing, after having bounced up from two-week lows at 113.25 on Thursday

Higher inflation expectations and stronger yields are buoying the USD

The greenback has been boosted by higher inflation expectations in the US, which have reinforced the idea that the Federal Reserve will be forced to accelerate its monetary policy normalization plan.

The US core personal consumption expenditures, the Fed’s preferred indicator for consumer inflation, has risen 3,6% year-on-year in September, which adds pressure on the bank to start increasing interest rates. As a consequence, US-T bond yields ticked up on the back of these figures, pushing the US dollar higher across the board.

Currency volatility surged in the second half of the week, after a very calm opening. Monetary policy decisions by the ECB, the BoC, and the BoJ plus the US GDP data have triggered significant fluctuations in FX markets. In that sense, the scenario can be fairly similar over the next week, with the investors awaiting decisions by the Federal Reserve, the Bank of England and the Reserve Bank of Australia.

USD/JPY: Forecast remains for a slide to 112.00 in three months – Rabobank

In spite of the current bullish reaction, FX Analysts at Rabobank remain dovish on the USD: “This may be a warning to the market that in view of the inflationary implications the BoJ is not entirely happy with the JPY’s position at the worst-performing G10 currency in the year to date. This signal may be sufficient to limit upside potential for USD/JPY near-term, particularly since the weakness of US Q3 GDP data has also undermined the greenback today.  We retain a 3 month USD/JPY forecast of 112.”

Technical levels to watch