Title: USD/JPY Hits 150.00 Mark Amidst Sustained Dollar Strength and BoJ Policy Divergence
Original Author: Anil Panchal, Mitrade
The USD/JPY currency pair reached the critical psychological level of 150.00 during early Asian trading on Friday, poised for its third consecutive weekly gain. The bullish sentiment surrounding the pair stems from the Federal Reserve’s persistent hawkish stance, contrasting greatly with the Bank of Japan’s continued ultra-loose monetary policy. The widening gap in interest rate outlooks between the U.S. and Japan has fueled carry trades and prompted investors to favor the U.S. dollar over the Japanese yen.
This article provides a breakdown of the key technical and fundamental factors driving the USD/JPY pair upwards. It also highlights what market participants should monitor moving forward.
Key Drivers Pushing USD/JPY Higher:
1. Federal Reserve’s Hawkish Tone:
– The Federal Reserve has maintained an aggressive stance on interest rates, reiterating its commitment to keeping borrowing costs elevated until inflation moves sustainably toward its 2% target.
– On Thursday, U.S. Federal Reserve Chair Jerome Powell delivered remarks that reinforced the case for prolonged tight monetary policy. While Powell acknowledged signs of easing price pressures, he noted that it was premature to claim victory over inflation.
– Powell’s statement: “We know that ongoing progress toward our 2 percent goal is not assured. Inflation has given us a few head fakes. We will not hesitate to tighten policy further if appropriate.”
– The persistent hawkish outlook adds upward pressure to short-term U.S. Treasury yields, consequently strengthening the U.S. dollar across multiple currency pairs, including the yen.
2. Yield Differential Between US and Japan:
– A widening yield spread between U.S. and Japanese government bonds continues to attract capital flows into dollar-denominated assets, making the yen comparatively less attractive.
– The 10-year U.S. Treasury yield has hovered near levels not seen in over a decade, underpinned by the Fed’s tighter policy trajectory.
– On the contrary, Japanese government bond yields remain subdued due to the BoJ’s firm grip on the yield curve through its Yield Curve Control (YCC) measures.
3. Bank of Japan’s Policy Inertia:
– Governor Kazuo Ueda and the Bank of Japan continue to emphasize the importance of supporting the domestic economy with accommodative monetary policy.
– The BoJ’s policy divergence from major global central banks has left Japan with the lowest interest rates among developed markets.
– Market speculation over a potential BoJ policy normalization has thus far failed to materialize into concrete action, further undermining the yen’s strength.
4. Carry Trade Momentum:
– Investors have resumed carry trade strategies, borrowing the low-yielding yen to invest in higher-yielding currencies like the U.S. dollar.
– The appeal of these carry trades persists as long as interest rate differentials remain wide and market volatility subdued.
– The downside risk to the Japanese yen is exacerbated when rates in the U.S. continue to rise or remain elevated, further incentivizing the carry trade.
5. Technical Breakthrough at 150.00 Level:
– The 150.00 psychological resistance barrier has been a key focal point for traders. The touching of this level once again indicates the pair’s potential to challenge higher levels.
– Historically, interventions by Japanese authorities have been triggered near this level. The last known intervention by the Ministry of Finance was in September-October 2022 when USD/JPY approached and crossed 150.
– With no active intervention so far this week, traders interpret this as a green light to continue pushing the pair higher unless signaled otherwise by Japanese officials.
6. Absence of Verbal or Direct Interventions from Japan:
– Despite the yen nearing intervention territory, Japan’s Ministry of Finance (MoF) has refrained from explicit warnings or verbal interventions.
–
Read more on EUR/USD trading.