- USD/JPY struggled to gain traction and traded in a range on the last day of the week.
- A combination of factors benefited the JPY as a safe haven and capped any significant gains.
- The Fed’s aggressive rate hike bets pushed the USD to a two-year high and acted supportive.
The pair USD/JPY wavered between tepid gains and minor losses during the middle of the European session and now appears to have stabilized just below 128.50.
A combination of divergent forces failed to provide any significant lift to the USD/JPY pair and led to moderate/range-bound price action on the last day of the week. Investors now seem concerned that Japan will step in to support its currency, coupled with a weaker risk tone, backed by the safe-haven Japanese yen. This, in turn, acted as a headwind for spot prices, although rising US Treasury yields lifted the US dollar to a fresh two-year high and offered some support.
Fed Chairman Jerome Powell on Thursday all but confirmed a 50 bps rate hike at the upcoming May 3-4 policy meeting and also hinted at back-to-back hikes this year. Markets were quick to price in three giant rate hikes this year, which, in turn, pushed the rate-sensitive 5-year US government bond yield above 3% for the first time. since 2018. In addition, the 10-year real yield turned positive for the first time in two years and continued to support the dollar.
By contrast, the Bank of Japan on Wednesday offered to buy unlimited amounts of Japanese government bonds to defend the 0.25% yield limit for the third time since February. Furthermore, the BoJ has repeatedly said that it remains willing to use powerful tools to prevent long-term interest rates from rising too high and sustain the current powerful monetary easing to support the economic recovery. The resulting policy divergence between the Fed and the BoJ further extended support for the USD/JPY pair.
The fundamental backdrop favors bullish traders and supports the prospects for an extension of the strong move higher. That said, the extremely overbought conditions on the daily/weekly/monthly charts warrant some caution. The next move will be the flash US PMI numbers. This along with US bond yields and market risk sentiment will weigh on the USD/JPY pair.
Technical levels
Source: Fx Street
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