- USD/JPY pulled back towards 115.50 on Monday as US yields and commodity prices rose, favoring the dollar against the yen.
- The pair remains well within recent ranges, with both currencies receiving a bid related to the uncertainties of the Ukraine war.
- Aside from geopolitics, Thursday’s US inflation data is a key event risk to watch.
As US yields rise to reflect the inflationary boost from the recent rally in commodity prices and currency markets continue to favor the currencies of countries that are net commodity exporters, the US dollar takes the lead. Although the JPY is by no means one of the worst performing G10 currencies amid a safe haven offering triggered by underperforming global equities, its vulnerability as a net commodity/energy importer in the current environment means that he USD/JPY it is improving. The pair probed but failed to break above the 115.50 level on Monday, and at current levels of 115.35 it is up roughly 0.5% on the day. That means most of Friday’s 0.6% drop from around 115.50 to 114.65 has been erased.
Traders won’t be reading too much into Monday’s intraday price action for USD/JPY. Unlike other USD majors (such as GBP/USD and EUR/USD), USD/JPY did not break above any key levels. Rather, the pair has remained within the confines of the 114.50-115.80 range that has prevailed for the past little over three weeks. Geopolitical developments and the commodity reading will likely remain the main driver in FX markets this week, suggesting further upside risk for the pair. February’s US consumer price inflation data will also be closely watched in case it comes in much hotter than expected and builds the case for a 50bp Fed rate hike later on. in the month (not the base case of the market at the moment).
Going forward, as the war in Ukraine continues and the risk of it escalating into a broader European conflict increases, both the USD and JPY are likely to remain in demand against most G10 crosses. But the backdrop of elevated and potentially still rising commodity prices, plus a Fed that appears (for now) determined to raise rates to at least neutral, suggests the dollar may be the most attractive safe haven. of the two. Perhaps that means that in the coming weeks, USD/JPY may once again challenge yearly highs at 116.35.
Additional technical levels
Source: Fx Street