USD/JPY stands resilient above 131.50 amid rising US Treasury yields and global banking system recovery

• USD/JPY rebounds from 129.64 as banking sector receives relief from FDIC intervention.
• US regulators explore emergency lending expansion, bolstering USD against safe-haven Yen.
• Fed's cautious stance on interest rates amid inflation concerns and banking crisis impact USD/JPY outlook.

The USD/JPY currency pair has found stability above the 131.50 mark as US Treasury (UST) bond yields rise. The US Dollar has reached a five-day high against the Japanese Yen due to US authorities' efforts to alleviate concerns surrounding the global banking system, which has helped calm investors.

After dropping to the 129.64 mark, USD/JPY reversed as market sentiment improved amid the ongoing banking crisis. Global banking stocks, which had been negatively impacted this month after the sudden collapse of Silicon Valley Bank (SVB) and Signature Bank, experienced relief on Monday. The Federal Deposit Insurance Corporation (FDIC) announced that First Citizens BancShares Inc would acquire all Silicon Valley Bank's deposits and loans from the regulator.

According to Bloomberg, US regulators are considering expanding an emergency lending facility for banks in ways that would grant First Republic Bank (FRC) additional time to strengthen its balance sheet. This news has reduced concerns, leading the US Dollar to gain ground against the Japanese Yen as investors scaled back their demand for the safe-haven Yen. Despite positive developments in the banking sector and rising UST bond yields, the US Dollar has remained in a narrow range against most of its counterparts.

On Wednesday, the U.S. Federal Reserve (Fed) increased interest rates by 25 basis points (bps) as anticipated but maintained a cautious outlook due to the banking sector turmoil. However, Fed Chair Jerome Powell left the possibility of further rate hikes on the table if necessary.

Market expectations for the US Dollar may remain subdued, as investors are pricing approximately a 55% chance that the Fed will keep interest rates unchanged at its next meeting in May. Additionally, they anticipate a possible rate cut as early as July. Earlier comments from Federal Reserve Board Governor Philip Jefferson highlighted that inflation has been more persistent and higher than desired. Recent Fed commentary has emphasized addressing inflation above the ongoing banking crisis.

The US calendar will feature the Goods Trade Balance for February on Tuesday. Later this week, the market focus will shift toward the release of the US Personal Consumption Expenditure (PCE) data, which could provide further direction for the USD/JPY currency pair.

Levels to watch