USD/JPY Approaches 142.00 Amid Fed Powell Testimony and Risk Aversion

• Powell’s testimony and the Fed’s rate hike weigh on USD/JPY, which continues to be propped up by rising US bond yields.
• Further USD/JPY gains expected as BOJ members support monetary easing.
• Key facts: US jobless claims, Fed statements and BOJ member Noguchi’s speech.

He USD/JPY trades around the 142.00 area on Wednesday, after hitting a low of 141.28, as Federal Reserve (Fed) Chairman Jerome Powell’s two-day testimony begins in Congress. Risk aversion is another of the drivers of the day, while US Treasury yields rise.

Markets favorable to the Fed rate hike in July; BoJ responsible moderates keep yen in check

Following last week’s monetary policy, Powell surprised markets with a balanced, if subdued, depending on market reaction, press conference. Since then, Fed officials have insisted on the need to rein in inflation to its 2% target, as vice chair nominee Philip Jefferson and Fed board member nominee Lisa Cook said recently.

The chances of the Fed raising rates by 25 basis points stand at 81.8%, according to the CME’s FedWatch tool. However, market participants are not expecting a further hike as they expect rates to peak at 5.25-5.50%, contrary to what the Fed’s dot charts indicate, revealed in the Summary of Economic Projections (SEP).

Meanwhile, USD/JPY continues to be supported by US Treasury yields, specifically the benchmark 10-year bond, which is up four and a half points to 3,769%. The Dollar Index, which measures a basket of six currencies against the USD, fell a surprising 0.16% to 102.367.

Meanwhile, as of this writing, Fed Chairman Powell is taking questions at a hearing on Capitol Hill. He said that he “may make sense to move rates higher, at a moderate pace,” emphasizing that speed and the level of rates “are separate.”

Apart from this, the members of the Bank of Japan (BOJ) were dovish as the minutes of the April meeting showed that the members mentioned that it is important to continue monetary easing. Some members stressed that past price increases are passed through to consumer prices with a lag.

Meanwhile, during the Asian session, BoJ Governor Kazuo Ueda commented that the economy is picking up moderately, although the central bank will keep monetary policy as it is. Adachi, a BoJ board member, commented that inflation is faster than he expected, but added that it is too early to change “easy” monetary policy. Adachi sees both upside and downside risks to the price outlook, but downside risks are broader in the longer term, suggesting continued monetary easing is appropriate.

Given the background, USD/JPY would likely continue its bullish trend, although the Japanese authorities would keep an eye on the pair. They have been adamant on the exchange rate of late, so USD/JPY buyers should be aware that intervention may be in the offing.

Upcoming events

Fed Chairman Jerome Powell will continue his two-day testimony in the US Congress, while Fed speakers continue to grab the headlines. As for the data, on Thursday the applications for unemployment benefits in the United States will be known. The Japanese agenda will count with the presence of Noguchi, a member of the Board of the BOJ.

USD/JPY Price Analysis: Technical Perspective

From a technical perspective, USD/JPY remains biased higher, but at a crossroads as it remains unable to decisively break away from last year’s November 22 high of 142.24. It has to be said that the Relative Strength Index (RSI) is bullish, while the 3-Day Rate of Change (RoC) shows that USD/JPY buyers are still in command. If USD/JPY breaks above 142.24, resistance will be at 143.52, the Oct 5 low, followed by the psychological level of 145.00.