Treasury yields have surged recently, strengthening the US dollar as investors seek higher returns from US assets. On the other hand, the yen has come under pressure due to Japan’s extremely low domestic interest rates.
According to Kazuo Ueda, an economist, and former Bank of Japan (BoJ) board member, most analysts expect central banks to continue raising interest rates over the next six months. However, the incoming BoJ chief is urging caution, arguing that Japan needs to persist with low-interest rates to support its fragile economy.
Ueda has warned of the consequences of using monetary tightening to curb cost-driven inflation, which could threaten the recovery of Japan’s economy. He believes the BoJ should maintain its current monetary policy stance, which involves a negative interest rate policy and yield curve control. Ueda believes the BoJ should prioritize supporting the Japanese economy over trying to achieve the elusive 2% inflation target.
USD/JPY Technical Analysis
Despite the diverging interest rate policies of the Fed and BoJ, the fundamentals remain bearish for the USD/JPY pair. According to technical analysis of the daily chart, there is plenty of room for the pair to move lower if the Fed continues to raise interest rates and the BoJ maintains its low-interest rate policy.
Currently, the main trend for the USD/JPY pair is up, but if it can trade through the 129.814 level, the main trend will change to down. The nearest support level is a retracement zone, which falls at 133.7000.
A closer look at the potential movements of the USD/JPY pair will indicate a bullish scenario if it manages to edge above the 136.285 level. If the pair creates enough buying momentum, it could top out at 138.173, confirming an uptrend and pushing towards the 139.586 to 142.503 retracement region.
However, if the pair breaches below the 136.495 mark, it will shift in favor of sellers. If the bearish momentum is sustained, it could see a charge toward the 132.7000 level, the next support level on the chart.
Fundamental Analysis of USD/JPY
The US inflation data, which showed an acceleration in the PCE index by 0.6% in the first month of 2023, gaining 0.2% over the last 12 months, will likely raise expectations for further rate hikes from the Federal Reserve. These rate hikes could increase demand for the US dollar and push the USD/JPY pair higher.
However, if the market perceives the Fed’s rate hikes to be too aggressive or if the central bank’s actions lead to a slowdown in economic growth, this could decrease demand for the US dollar and push the USD/JPY pair lower, for example, if the Fed raises interest rates too quickly, it could cause borrowing costs to rise and hamper the USD/JPY pair’s price.
Furthermore, increased spending in the US, as seen in the rebounding of spending in January, could boost the country’s economy and support the US dollar, which could also impact the USD/JPY pair.
However, the increased spending could also lead to inflationary pressures and concerns about the sustainability of the US economic recovery. In such a scenario, this could decrease demand for the US dollar and push the USD/JPY pair lower.
The divergence in interest rate policies is likely to continue to have a significant impact on currency markets, with the USD benefiting from rising yields and the yen facing pressure from low domestic rates.