- The Japanese yen continued to plummet to as low as 153.23 against the US dollar, its lowest level in 34 years, after data showed US inflation rose more than expected.
- This is reinforcing the view that the Federal Reserve will need to keep its target interest rate at a 23-year high.
- On the other hand, despite recent tightening, Japan's key short-term interest rate remains around 0% to 0.1%, encouraging carry trade buying.
In general, analysts fear that an exchange rate of $152 could prompt Japanese authorities to intervene in forex markets. In this regard, Japanese Finance Minister Shunichi Suzuki said on Tuesday that the authorities will not rule out taking any action to deal with excessive yen moves, repeating warnings made in his previous statements.
On the other hand, the yield on 10-year Japanese government bonds rose to a five-month high above 0.8%, while the yield on two-year bonds jumped to around 0.26%, its highest level since late 2009. Moreover, Japanese government bond yields followed the rise in US bond yields after hotter-than-expected US data.
Overall, the inflation data dampened hopes for early US rate cuts by the Federal Reserve. Markets now expect the Fed to hold rates steady in June and see only two rate cuts this year instead of three. Also, Japanese yields rose this week as Bank of Japan Governor Kazuo Ueda said the central bank would work to reduce monetary stimulus if inflation continues to trend sustainably around 2%. Furthermore, he told parliament that the BOJ will watch the data to see how strong wage growth is in line with the results of Labor negotiations this spring.
Recently, the Bank of Japan raised interest rates for the first time since 2007 at its March policy meeting, ending eight years of negative interest rate policy. The central bank also abandoned yield curve controls and reduced asset purchases.
USD/JPY Technical Analysis and Expectations Today:
The overall trend of the USD/JPY pair is gaining strength in its sharp upward trend, and its recent gains have pushed all technical indicators towards strong overbought levels. After these gains, the eyes of markets and investors are turning to Japan. Will it intervene in forex markets soon and strongly to prevent further collapse of the exchange rate? If so, it will bring strong selling to the USD/JPY pair, changing its direction to bearish in a short time.
In general, as we mentioned, until Japanese intervention in the markets, the divergence between the policies of the Bank of Japan and the US Federal Reserve. Also, along with economic performance, all will be factors of strength for the bulls to continue to dominate the direction of the USD/JPY pair.
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