Original article credit: Mitrade, Article by FXStreet on August 16, 2023.
Title: USD/JPY Rises as US Dollar Strengthens on Fed Meeting Minutes and Treasury Yields
The USD/JPY currency pair recorded a notable gain during the US trading session on Wednesday, propelled by optimism among investors that the US Federal Reserve may maintain a hawkish stance in its upcoming monetary policy decisions. The pair closed at its highest level since November 2022, and momentum continues to build, supported further by rising US Treasury yields.
Key Highlights
– USD/JPY rose over 0.80% during the day and closed near 146.20.
– Investors digested the Federal Open Market Committee (FOMC) Meeting Minutes released Wednesday.
– The minutes revealed widespread concerns among Fed officials about persistent inflation.
– Continued tightening was consented to during the last Fed meeting.
– The US 10-year Treasury yield climbed above 4.25%, the highest in over a year.
– The Japanese Yen weakened further as the Bank of Japan remains committed to its ultra-loose monetary policy framework.
Fed Minutes Suggest More Hiking Ahead
According to the minutes from the July FOMC meeting, the Federal Reserve appears to be leaning toward more rate hikes, driven by persistent inflation in key sectors of the economy. Most officials at the meeting emphasized that upside risks to inflation were a key concern. Although officials acknowledged some signs of easing inflation, they viewed the risks as still titled to the upside.
The following insights could be drawn from the FOMC Minutes:
– Several members highlighted that it may be appropriate to raise interest rates further.
– Two members opposed the hike in July, favoring no change amid signs of a slowing economy.
– Many policymakers warned about the lagged impact of previous policy tightening.
– However, the consensus was that inflation remained well above the Fed’s 2% target.
– Market expectations now suggest a possible 25 bps hike by year-end if inflation remains sticky.
The Fed raised the federal funds rate in July to a range of 5.25% to 5.50%, which marked the highest level since 2001. Despite this, the economy has continued to display resilience, with GDP growth, job creation, and consumer spending outperforming expectations.
Yield Curve and Treasury Markets Support USD
American bond markets have seen upward momentum across the yield curve in recent weeks. On Wednesday, the 10-year Treasury yield crossed 4.25% — its highest since October 2022. Yields on shorter tenor bonds, like the two-year Treasury, also remain elevated, underscoring strong expectations of prolonged tight monetary policy.
Drivers of Treasury yield increases include:
– Persistent inflation, even if off its June 2022 peak.
– The Federal Reserve’s continued quantitative tightening and shrinking of its balance sheet.
– Strong macroeconomic indicators such as job growth and manufacturing activity.
– International capital demand skewing toward the US fixed income market amid global instability.
The higher yield environment incentivizes foreign investors to divert capital into US Treasuries, pressuring the Japanese Yen as capital flows out of Japan.
USD/JPY Technical Outlook
The USD/JPY pair has been rising steadily since mid-July after finding support at the 137.25 level. The recent surge has pushed the pair past critical resistance levels.
Technical observations include:
– The pair broke through 145.00 earlier this week, establishing a bullish breakout.
– The 50-day moving average remains significantly below the current market price, confirming upward momentum.
– The Relative Strength Index (RSI) shows the pair is not yet in overbought territory, indicating the possibility of further upside.
– The next resistance is observed around 147.50, a level last seen in September 2022.
– Key support lies at 144.30, followed by the 143.00 level in case of a short-term pullback.
Analysts note that if US yields continue to climb
Read more on EUR/USD trading.