The US dollar increased its gains against all other major currencies and continued to break stronger bullish levels. It pushed the US dollar index DXY, which measures the performance of the US currency against a basket of other major currencies, to its highest level in 10 months. In the case of the currency pair the US dollar against the Japanese yen USD/JPY, has jumped to the resistance level of 149.70, the highest it has been in ten months. It is also the closest point to the psychological resistance of 150.00, which is often referred to as the possibility of Japanese intervention in the markets at any time.
The Fed's "higher for longer" mentality still appears to be fueling the currency's engines, as well as raising Treasury yields, with the 10-year yield jumping to a new 16-year high on Tuesday on the back of the data which indicates a flexible economy capable of withstanding further increases in American interest rates.
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For his part, the president of the Federal Reserve Bank of Minneapolis, Neil Kashkari, said this week that a "soft landing" is more likely, adding that there is a 40% chance that they will need to raise US interest rates actively to fight inflation, with the case of raising interest rates again and then staying the same receives a 60% probability. However, the market is pricing in a less than 50% chance of another quarter percentage point rate hike before this tightening campaign ends, while expecting rates to end 2024 at lower levels than last week's dot chart suggested. This means that there is still room to modify the upward trend, and thus more progress in the price of the US dollar, especially if the upcoming US data continues to indicate a strong economic performance.
Overall, the next focal point for dollar traders may be the US core personal consumption expenditure index for August on Friday, which is expected to slow slightly to 3.9% year-on-year from 4.2%. While this could push the US currency lower, it is unlikely to change broader expectations, as the index will remain well above the Fed's 2% target and is unlikely to combine with more data pointing to Economic flexibility to stimulate policy makers at the Federal Reserve Bank. To change the "higher for longer" mentality.
The USD/JPY currency pair is extending its upward trend as Treasury bond yields continue to rise while the Bank of Japan keeps a cap on its government bond yields. With this gap widening, the currency pair continues to rise for longer as the Bank of Japan appears to be in no rush to adjust its policy anytime soon. However, the higher the pair, the higher the probability of intervention. Another round of verbal warnings reached the wires on Tuesday, with Finance Minister Suzuki saying they were "monitoring currency movements with a great sense of urgency." According to market chatter, around 150.00 may be the dividing line that could lead to action, but with no repeat warnings like last year, the level of intervention may have gone up a bit.
However, with the Bank of Japan unwilling to change policy anytime soon and Fed officials vowing to keep interest rates higher for longer, the gap between US and Japanese yields may continue to widen, meaning any decline in the dollar against the yen due to the intervention is unlikely to be permanent.
Expectations of the dollar against the Japanese yen today:
- According to the performance on the daily chart below, the general trend of the USD/JPY currency pair is still rising.
- The psychological resistance of 150.00 was broken today, if the results of the American economic data are in favor of further tightening of the policy of the American Federal Reserve Bank.
- When the level is breached, the markets will watch the Japanese response to that.
Japan gave up the intervention, which means that the intervention threshold for the officials has changed, which allows the currency pair to make more gains. So far, we prefer not to think about buying from those standard peaks, but to think about selling, but without risk, in case of Japanese intervention in the markets, the currency pair will be exposed to strong and sharp sales.
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