USD/JPY OUTLOOK:
- USD/JPY strengthened at the start of the week, buoyed by rising U.S. Treasury rates
- Earlier on the trading session, the 2-year and 10-year bond yields reached highs not seen since July 2019
- The FOMC rate decision and forward guidance could boost the U.S. dollar in the near term
Most read: USD/JPY Breakout Continues as US Rate Hikes Loom Large
USD/JPY has been on a tear in recent weeks, surging more than 2.6% since the beginning of the month amid widespread U.S. dollar strength in the FX market. On Monday, the pair maintains bullish momentum, and is up approximately 0.6% to 117.98, supported by rising U.S. Treasury yields ahead of a key event this week: the Federal Reserve rate decision.
On Wednesday, the FOMC will conclude its two-day March meeting and unveil its monetary policy decision at 14:00 ET. The central bank is expected to raise borrowing costs by 25 basis points to a range of 0.25-0.50% amid rising inflationary pressures and tight labor market conditions.
The start of the liftoff has been telegraphed thoroughly, so the focus will be on forward guidance and the macroeconomic assessment, which includes the dot-plot, a diagram showing projections of the federal funds rate for the forecast horizon.
Earlier this month, Fed Chairman Powell stated before the House Financial Committee the following:“To the extent that inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings.” Since then, headline CPI has hit a four-decade high, reaching 7.9% year-over-year in February. Expectations have also risen violently, bolstered by the commodity market price shock caused by the Ukraine war, with the 10-year breakeven inflation rate at 2.94% last Friday, a record high.
With inflation worsening and breaking out in just about every major category of goods and services, policymakers may adopt a hawkish stance and pencil in a steeper pace of tightening than contemplated a few months ago. That said, the December dot plot envisioned three rate hikes in 2022, but the document to be released this week could show five or even six rate increases for the year (median forecast).
The U.S. Treasury curve shifted upwards on Monday ahead of the FOMC event, with the 2-year yield rising 7bp to 1.82% and the 10-year yield soaring 11bp to 2.11%, the highest level since July 2019 in both cases. Bond rates are likely to continue repricing higher in the near term if the Fed advocates for a more forceful response to mounting price pressures. This should be a bullish catalyst for the US dollar and could push USD/JPY towards the 120.00 region.
USD/JPY TECHNICAL ANALYSIS
After breaking above technical resistance at 116.40, USD/JPY has accelerated its advance, moving closer to the 118.00 handle at the start of the week. If buying interest remains strong in the coming sessions, bulls could launch on attack on the December 2016 high at 118.66. From this area, it is possible to see a bearish reversal considering the overbought condition of the market, but if the ceiling is breached on the topside, the recent rally could extend higher, with 121.65/122.00 being the immediate upside focus.
On the flip side, if USD/JPY corrects lower unexpectedly, support is seen at 116.40. If sellers manage to drive the exchange rate below this floor, we could witness a move towards 114.50.
USD/JPY TECHNICAL CHART
USD/JPY chart prepared using TradingView
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—Written by Diego Colman, Contributor
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