- Recently, the US dollar exchange rate against other major currencies has remained supported by new warnings from Federal Reserve Chairman Jerome Powell that US interest rates will need to stay at current levels for longer than previously expected.
- However, the story of Fed repricing may now be reaching its limits.
- Amidst the continued divergence between the Fed and the Bank of Japan, the sharp upward trend of the USD/JPY currency pair continued with gains extending above the 154.78 resistance level, the highest in 34 years.
- Furthermore, the currency pair is settling around its gains awaiting Japanese intervention in the markets.
For his part, Federal Reserve Chairman Jerome Powell said: "It is clear that the latest data has not given us more confidence, and instead suggests that it will likely take longer than expected to achieve that confidence."
In general, expectations for US rate cuts in 2024 have fallen to just 38 basis points (one 25 basis point cut) after the comments, further supporting US bond yields and the dollar. Commenting on the performance of the US dollar, Jamie Dutta, head of forex analysis at Vantage Markets, which provides forex trading accounts, says: "The US dollar has hit its cycle highs, rising for the fifth consecutive day." "Fed Chair Powell backed away from comments about rate cuts."
In comments made alongside Bank of Canada Governor Tiff Macklem, Powell said: "If high inflation persists, we can keep the current level of as long as needed."
Meanwhile, markets had entered 2024 expecting cuts of up to 150 basis points in 2024; this has been reduced to just 38 in the repricing that has boosted US bond yields and attracted foreign currency inflows to the US dollar. At the same time, the decline in global equity markets reflects a decline in investor confidence, which is boosting demand for safe-haven assets such as the US dollar. This creates a win-win scenario for the US currency, and further progress is likely.
For his part, Lee Hardman, senior currency analyst at MUFG, says: "The sharp and sustained rise in US yields has begun to have a greater impact on risky assets. The gains of the US Dollar Index are more impressive year-to-date, up nearly 6%." From its low at the end of last year." Also, federal Reserve Vice Chairman Philip Jefferson and Richmond Fed President Thomas Barkin echoed Powell's remarks. Jefferson said he expects US inflation to continue to moderate if interest rates remain at their current level, but ongoing price pressures will justify keeping borrowing costs high for longer. Now, Forex market participants must ask themselves how far this trend can continue. Ultimately, the lion's share of the repricing in the Fed's 2024 expectations is already in the rearview mirror, suggesting the law of diminishing returns.
In short, we will now watch for signals that the USD rally may have peaked as the Fed's repricing has reached its highest levels.
USD/JPY Technical Analysis and Expectations Today:
As we mentioned before, and we confirm now, the discrepancy between the US Central Bank’s policy and the Bank of Japan will remain an important factor to complete the bulls’ control over the direction of the price of the US dollar against the Japanese yen (USD/JPY). This pair’s successive record gains were sufficient to push all technical indicators towards saturation levels. Strong buying in the event of actual Japanese intervention in the currency markets, as the Japanese administration has often warned. Also, the price of the dollar against the Japanese yen may be exposed to strong selling operations to take profits, with which the direction will turn bearish for a limited period, then return to the upward path again. Furthermore, if the factors of gains of the currency pair mentioned above remain existing. Currently, the closest resistance levels to the trend are 154.65, 155.20, and 156.00, respectively.
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