- USD/JPY regains positive traction on Wednesday and reverses the previous day’s decline to a one-week low.
- Expectations of an aggressive rate hike from the Fed and a rally in US bond yields push the USD to a two-year high.
- Risk appetite and monetary policy divergence between the BoJ and the Fed weigh on the JPY and provide additional momentum.
The pair USD/JPY clings to daily profits, just below the 128.00 levelduring the European session on Wednesday.
A combination of factors helped the USD/JPY pair attract fresh buying on Wednesday and reverse a major part of the previous day’s decline to a one-week low. A solid recovery in US stock index futures weighs on the safe-haven Japanese yen, which is further affected by the divergence in monetary policies between the Fed and the Bank of Japan.
Recent aggressive comments from FOMC members, including Fed Chairman Jerome Powell, reaffirm expectations of more aggressive monetary policy tightening by the US central bank. In fact, the markets now anticipate that the Fed would raise interest rates by 50 basis points at each of its next four meetings in May, June, July and September.
The prospect of rapid rate hikes in the US, coupled with a rally in US Treasury yields, drove the US dollar to its highest level since the start of the COVID-19 pandemic in March 2020. In contrast, the BoJ again offered to buy indefinite amounts of Japanese government bonds on Tuesday to defend the 0.25% yield limit.
Besides, the BoJ has said multiple times that it remains ready to use powerful tools to prevent long-term rates from rising too high and sustain ultra-loose monetary policy to support economic recovery. The Japanese central bank is expected to announce additional stimulus to boost demand.
So the market’s focus remains on the BoJ’s monetary policy decision, scheduled to be announced during the Asian session on Thursday. Meanwhile, the fundamental backdrop favors the pair’s bulls, suggesting that the recent corrective pullback from the two-decade high around the 129.40 region is over.
Market participants are now waiting for the second tier economic releases from the US for some boost at the start of the American session. The data, along with US bond yields, could influence USD price dynamics. Aside from this, investors will also take cues from the broader market risk sentiment to take advantage of some short-term opportunities around the USD/JPY pair.
USD/JPY technical levels
Source: Fx Street
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