In response to rebounding USD demand, USD/JPY picks up new bids and moves closer to the YTD top. Hawkish Fed predictions drive up US bond rates and give the dollar another boost.
Bullish traders are favored by the contrasting Fed-BoJ policy outlook, which enhances the likelihood of additional gains. During the early European session on Thursday, the USD/JPY pair is seen strengthening after the late overnight comeback from the 135.25 regions and progressively climbing again closer to the YTD top at 136.90. Bulls are waiting for a sustained rise over the 100-day Simple Moving Average (SMA) at 136.70 before making new bets as the pair presently trades in the 136.70 area.
The US Dollar, which regains bullish momentum and partially undoes the previous day’s strong retracement slip from a multi-week high amid an increase in US Treasury bond rates, pushes the pair higher. As prospects for more Fed policy tightening increase, the standard 10-year US government bond yield rises beyond the 4.0% barrier and reaches its highest level since November 2022. The markets seem certain that the US central bank will maintain higher interest rates for a more extended period than first anticipated due to persistently strong inflation.
The overnight hawkish comments by Atlanta Fed President Raphael Bostic reiterated the belief that the policy rate has to increase to the 5.00%-5.25% range and continue at that level for at least the remainder of 2024, raising the bets. Neel Kashkari, president of the Minneapolis Fed, added to this by reiterating that the US still has extremely high inflation and that its mission is to lower it. The danger of under-tightening is greater than the risk of over-tightening, according to Kashkari. Also, the Prices Paid sub-component of the US ISM Manufacturing Index increased from 44.5 to 51.3 in February, further bolstering the argument for inflation.
On the other hand, the Japanese Yen (JPY) is weakened by the recent dovish comments made by the BoJ nominees for deputy governor and governor, Kazuo Ueda and Shinichi Uchida, underlining the necessity to preserve the ultra-loose monetary policy. Yet, the cautious market atmosphere, brought on by the threat of an impending recession, may work in the JPY’s favor and limit the upward potential for the USD/JPY pair. So, it will be wise to hold off on positioning for a continuation of the current appreciating trend seen over the previous few weeks until there has been an exciting breakthrough over the 100-day SMA level.
The customary US Weekly Initial Jobless Claims data will be released later in the early North American session. Lower-than-expected Claims will keep the US Dollar strong and provide the USD/JPY a positive foundation. This will influence USD demand, the USD/JPY market dynamics, and US bond rates. In addition, traders will use the general risk attitude as a hint to seize short-term chances before Friday’s Asian session, when prominent FOMC members are expected to speak.
