- USD/JPY is supported by the breakout of the rally above 150.00 and hits a fresh 32-year high.
- The divergence between the Fed and BOJ policies and the widening of the rate differential between the US and Japan weigh on the yen.
- Fed Expectations, High US Bond Yields Lift Dollar and Remain Supportive.
The USD/JPY pair adds to its strong intraday gains and continues to climb higher during the early American session. However, the momentum stalls before 152.00 and the pair quickly pulls back to 151.50 in the last hour.
The Japanese yen has been the worst performing G10 currency, depreciating more than 30% against the US dollar since the beginning of the year. A wide divergence in the monetary policy stance adopted by the Bank of Japan and the Federal Reserve turns out to be a key factor behind the USD/JPY pair’s move higher.
Indeed, the Bank of Japan remains committed to continuing its monetary easing and has so far shown no inclination to raise interest rates from ultra-low levels. In addition, the Japanese central bank announced a $667 million emergency bond purchase to keep the yield on Japanese government bonds below 0.25%.
In contrast, the 10-year US Treasury bond yield hit its highest level since the 2008 financial crisis, amid expectations of more aggressive policy tightening by the Fed. widening of the rate differential between the US and Japan, which, together with the resurgence in demand for US dollars, boosts the USD/JPY pair.
Aside from this, the strong rally on Friday could also be attributed to some technical buying following the overnight break of the key psychological 150.00 level. That said, reports that the Fed may debate whether to signal plans to approve a smaller hike in December do spark some dollar selling and cap USD/JPY.
On the other hand, the extremely oversized technical indicators on short-term charts warrant some caution and could deter bulls from making further bets. However, the USD/JPY pair remains on track to post its 10th consecutive weekly advance as attention now turns to the Bank of Japan’s October 28 monetary policy meeting.
Technical levels to watch
Source: Fx Street
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