USD/JPY surges past mid-144.00s amid post-US CPI rally in USD and US bond yields

The USD/JPY pair witnessed a dramatic intraday turnaround and rallied over 200 pips during the early North American session following the release of US consumer inflation figures. The pair is currently placed near the daily high, just above mid-144.00s, and has now moved well within the striking distance of a 24-year high touched last week.

The US dollar stages a solid rebound from the fresh monthly low touched earlier this Tuesday after the stronger-than-expected US CPI report lifted bets for a more aggressive policy tightening by the Fed. This, in turn, is seen as a key factor that assisted the USD/JPY pair to attract fresh buying near the 142.60-142.55 area on Tuesday.

The markets have now started pricing in the possibility of a jumbo 100 bps rate hike at the upcoming FOMC meeting on September 20-21 and another supersized 75 bps hike in November. This is reinforced by a sharp spike in the US Treasury bond yields. In fact, the yield on rate-sensitive two-year US government bonds surges to the highest level since 2007.

Moreover, the benchmark 10-year US Treasury note jumps back closer to the YTD peak touched in June, widening the US-Japan rate differential. This, along with a big divergence in the Fed-Bank of Japan policy differential, offsets the risk-on impulse and fails to lend any support to the Japanese yen or stall the USD/JPY pair's strong intraday rally.

It will now be interesting to see if bulls can maintain their dominant position amid speculations that authorities may soon step in to arrest a freefall in the JPY. This makes it prudent to wait for a sustained strength beyond the 145.00 psychological mark before traders start positioning for the resumption of the recent well-established upward trajectory.

Technical levels to watch