- A combination of factors helped USD/JPY attract some buying near the 134.35 area on Friday.
- Risk boost, widening US-Japan yield spread weighed on safe-haven JPY.
- The policy divergence between the Fed and the Bank of Japan suggests that the pullback from the 24-year high has run its course.
The pair USD/JPY attracted some buying near the 134.35 area on Friday and recovered more than 85 pips from the daily low. The pair rallied back above the key psychological 135.00 level during the mid-European session, although there was no follow-up buying.
The significant decline in commodity prices this week appears to have eased fears over persistently rising inflationary pressures and buoyed investor sentiment. This, in turn, triggered a rebound in risk appetite, which came courtesy of a strong rally in global equity markets and reduced demand for traditional safe-haven assets, including the Japanese yen.
A nice recovery in global risk sentiment allowed US Treasury yields to rebound from a nearly two-week low hit on Thursday. This led to a widening gap between US and Japanese bond yields, which, together with a wide divergence in the monetary policy stance adopted by the Bank of Japan and the Fed, further undermined the yen.
It should be recalled that the Bank of Japan decided last week to maintain the massive stimulus program and pledged to defend the 0.25% cap on the 10-year JGB yield in order to support a still fragile economy. In contrast, the Fed remains on track to maintain its policy tightening path and is expected to raise interest rates again by 75 basis points in July to curb rising inflation.
Fed Chairman Jerome Powell, during his second day before Congress on Thursday, reaffirmed the market’s bets and underscored an unconditional commitment to rein in inflation, even amid risks to growth. This, in turn, favors dollar bulls, although speculation that further yen depreciation could force some form of practical intervention could cap the USD/JPY pair.
Market participants now await St. Louis Fed President James Bullard’s scheduled speech. Traders will continue to watch US economic data: the revised Michigan Consumer Sentiment Index and new home sales. This coupled with US bond yields, dollar price action and broader risk sentiment should give the USD/JPY pair some lift.
Technical levels
Source: Fx Street
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