USD/JPY Catapults Higher as Rally in Bond Yields Boosts US Dollar’s Appeal
- USD/JPY rises and challenges key tech level amid rapidly rising U.S. Treasury yields
- The Japanese yen could extend weakness against the U.S. dollar if expectations for the Fed’s terminal rate continue to drift higher
- This article looks at key technical levels to watch in the USD/JPY this week
The US dollar, as measured by the DXY index, advanced moderately and held near six-week highs on Tuesday, supported by risk-off sentiment and rising U.S. Treasury yields. Meanwhile, USD/JPY rallied more briskly, up more than 0.5% to 134.90 in afternoon trading during the New York session, just a touch below an important technical resistance created by the psychological level of 135.00.
After selling off in late 2022, USD/JPY has started to recover at a rapid pace in tandem with the rally in bond yields. Until a few weeks ago, traders were convinced that the Fed would pause its hiking cycle in the first quarter and start cutting rates sometime in the second half of the year, but those expectations have faded following strong employment numbers and sticky CPI data.
The U.S. labor market has proven to be much more resilient than previously thought, raising the risk that wage pressures could remain skewed to the upside. This comes at a time when the inflation outlook has started to evolve less favorably than projected amid stubbornly high prices in the services sector. Against this backdrop, the Fed may have no choice but to continue raising interest rates in the coming months, preventing a monetary policy pivot anytime soon.
2023 FED FUNDS FUTURES IMPLIED RATE & TREASURY YIELDS
With the Fed’s terminal rate drifting higher day after day (now at 5.35% as shown above), the U.S. dollar could extend its recovery in the near term, especially against low yielders such as the Japanese yen. This means that USD/JPY may have more upside this month before pausing for some price action consolidation.
In terms of technical analysis, USD/JPY is steadily approaching the 135.00 level following recent gains. If the pair manages to break above that barrier decisively, buyers could launch an attack on 136.65 in short order, a major technical resistance created by the 200-day simple moving average and the 38.2% Fib retracement of the October 2022/January 2023 slump. On further strength, the focus shifts to 138.25.
On the flip side, if sellers return and spark a bearish reversal, initial support lies around the 133.00 handle. Below this floor, the 50-day simple moving average comes in focus, followed by 129.75.
USD/JPY TECHNICAL CHART
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