USD/JPY rises near 132.55 after hitting a 20-year high around 133.00

• USD/JPY continues to extend its weekly gains to 1.29%.
• Risk appetite and rising US Treasury yields lift USD/JPY.
• The Bank of Japan will maintain ultra-loose monetary policy, despite the yen’s weakness.
• USD/JPY Price Forecast: Pull Back Towards 132.00 as Bulls Prepare Attack Towards 135.16

The USD/JPY rose for the third day in a row and hit a 20-year high at 133.00, a level last seen in April 2002, amid an upbeat market mood and also buoyed by rising US Treasury yields. However, USD/JPY is pulling back towards 132.50 at the time of writing, up 0.49%.

Upbeat sentiment and elevated US Treasury yields are the tailwind for USD/JPY

Market sentiment is mixed as European stocks are lower while US equities are higher. Meanwhile, the 10-year US Treasury yield is below the 3% threshold, after Monday’s jump, down seven basis points to 2,974%.

In Tuesday’s overnight session, the Reserve Bank of Australia (RBA) joined the list of global central banks, surprisingly raising its overnight rate by 50 basis points. The Central Bank said it would do “whatever is necessary” to control inflation. So a scenario with higher yields, and a global economic slowdown, put the prospect of stagflation on the table.

Earlier, the World Bank lowered the global growth forecast to 2.9% from 4.1% in January. World Bank President David Malpass said risks from stagflation, the Russo-Ukrainian war and lockdowns in China have been hitting growth and a recession will be difficult for many countries to avoid. Meanwhile, while global inflation is expected to moderate next year, it is likely to remain above target in many economies.”

Meanwhile, during the Asian session, weaker-than-expected data was released from Japan, particularly household spending. The reading was up -1.7% y/y vs -0.6% estimated. With no wage pressure in the near future, the Bank of Japan has made it clear that it will maintain its loose monetary policy.

Monetary policy divergences will continue to widen, leading to continued yen weakness. Governor Kuroda retracted his comments yesterday about greater tolerance by consumers in accepting higher prices, saying: “I didn’t necessarily say it properly.” Officials have the difficult task of explaining exactly why the exit from years of deflation should be welcome. April’s leading and coincident indices were also released.

The US economic docket is absent, though initial jobless claims and continuing claims will be released on Thursday. On Friday, US inflation readings coupled with consumer confidence are expected to shed some light on current economic conditions.

Therefore, USD/JPY continues to have a bullish bias, pressured by rising US Treasury yields. The spread between the two countries’ 2-year yields continues to widen, so USD/JPY traders could expect additional buying pressure unless the Japanese authorities threaten verbal intervention or intervene in the FX market.

USD/JPY Price Forecast: Technical Outlook

USD/JPY pulls back from the 133.00 figure, aiming to form an “inverted hammer” candle. Additionally, the Relative Strength Index (RSI) at 71 in overbought territory could deter USD/JPY buyers from increasing or opening new long positions due to overextended price action. Due to the increased volatility in the pair, USD/JPY could be subject to a mean reversion move.

Therefore, using the Bollinger Band indicator, a move to the upper band around 131.97 looms as USD/JPY bulls take a breather before pushing towards the January 2002 high around 135.16.

That said, the first support for USD/JPY would be the June 6 high at 132.01. A break below would expose the aforementioned band at 131.97.

Technical levels