- USD/JPY regains some positive traction on Friday amid aggressive USD buying.
- The dollar hits a new 20-year high amid bets on a faster Fed rate hike.
- The policy divergence between the Fed and the Bank of Japan supports the outlook for further short-term gains.
The pair USD/JPY attracts some buying near the 141.75 area on Friday and builds on the overnight bounce from a two-week low. The pair updated daily highs during the first half of the European session, although it quickly fell back to 143.00 in the last hour.
The knee-jerk reaction overnight to intervention by the Japanese authorities to stem the yen’s rapid decline proved to be short-lived amid strong bullish sentiment around the US dollar. Indeed, the dollar index, which measures the USD’s performance against a basket of currencies, hits a new 20-year high and continues to be supported by growing bets on a more aggressive Fed rate hike. turns out to be a key factor providing a modest lift to the USD/JPY pair.
It’s worth remembering that the Fed took a more hawkish tone on Wednesday, signaling that it will carry out more aggressive rate hikes to curb stubbornly high inflation. This continues to favor higher US Treasury yields and continues to act as a tailwind for the dollar. The interest rate-sensitive 2-year Treasury yield hit a new 15-year high and the 10-year Treasury yield jumped to its highest level since 2011 on Thursday.
On the other hand, the Bank of Japan aggressively defended its yield curve ceiling and reaffirmed its commitment to ultra-low interest rates on Thursday. This translates into a widening US-Japan rate spread, weighing on the Japanese yen and providing additional support to the USD/JPY pair. However, the prevailing risk appetite environment helps limit losses for the safe-haven yen and limits the pair’s upside, at least for now.
That said, the policy divergence between the Fed and the Bank of Japan, which has been a key factor in the yen’s more than 25% drop against the dollar since early 2022, suggests that the path of least resistance for the pair USD/JPY is on the upside. Market participants are now waiting for the US PMI data to gain some momentum ahead of Fed Chairman Jerome Powell’s speech. Traders will follow indications from US bond yields and broader risk sentiment to take advantage of short-term opportunities.
Technical levels
Source: Fx Street
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