- USD/JPY is seen consolidating its recent strong bullish run to the highest level since August 1990.
- The Fed-BoJ policy divergence weighs on the JPY and acts as a tailwind amid modest USD strength.
- Speculations that Japanese authorities will intervene again hold back bulls from placing fresh bets.
The USD/JPY pair extends its consolidative price moves and remains confined in a narrow trading band through the Asian session on Wednesday. The pair is currently placed comfortably above the 149.00 mark, just a few pips below the highest level since August 1990 touched the previous day.
Traders prefer to move to the sidelines amid speculations that Japanese authorities might intervene in the markets to stem any further weakness in the domestic currency. In fact, Japan's Finance Minister Shunichi Suzuki warned on Tuesday that the government will take decisive action against excessive, speculator-driven currency moves. This, in turn, is seen offering some support to the Japanese yen and acting as a headwind for the USD/JPY pair.
The downside, however, remains cushioned amid the emergence of some dip-buying around the US dollar, bolstered by expectations for a more aggressive policy tightening by the Fed. Investors seem convinced that the US central bank will continue to hike interest rates at a faster pace to tame inflation and have priced in a nearly 100% chance of a 75 bps increase in November. This remains supportive of elevated US Treasury bond yields and underpins the USD.
In fact, the yield on the rate-sensitive 2-year US government bond and the benchmark 10-year Treasury note stand tall near a multi-year peak. In contrast, the 10-year JGB yield is capped at 0.25%. This resultant widening of the US-Japan rate differential continues to weigh on the JPY and offers support to the USD/JPY pair amid a more dovish stance adopted by the Bank of Japan. This, along with the prevalent risk-on mood favours bullish traders.
This, in turn, suggests that the path of least resistance for the USD/JPY pair is to the upside and any meaningful pullback might still be seen as a buying opportunity. Market participants now look forward to the US housing market data - Building Permits and Housing Starts - for a fresh impetus later during the early North American session. This, along with the US bond yields, will drive the USD demand and influence spot prices.
Technical levels to watch
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