- USD/JPY rallies for the third straight session on Fed’s hawkish expectations.
- Fed-BOJ monetary policy divergence benefits the currency pair.
- The pair’s path of least resistance appears up, with eyes on US CPI, Fed minutes.
USD/JPY is consolidating near 112.75, gathering pace before initiating a fresh upswing to test the 113.00 threshold.
In doing so, the spot sits at the highest levels seen since December 2018, extending the previous week’s bullish momentum.
The main catalyst behind USD/JPY’s surge is the relentless rise in the US Treasury yields across the curve amid rising expectations that the Fed would taper its bond-buying program as early as the next month to stem the rising in inflation, especially against the backdrop soaring energy costs.
On the Japan side of the story, the Bank of Japan (BOJ) is far from its 2% price target and, therefore, is unlikely to alter its monetary policy settings any time soon. The monetary policy divergence between the Fed and the BOJ is well represented by the widening US-Japanese yields differential, which remains in favor of the dollar bulls.
Meanwhile, a relatively upbeat market mood, with the Nikkei 225 index up by over 1%, weighed on the safe-haven yen and collaborated with the upside in the major. Japanese PM Fumio Kishida said that he will decide swiftly on the economic package after the general elections.
Looking ahead, the Fed and inflation expectations are likely to lead the sentiment amid light trading, with all eyes on Wednesday US CPI data and the Fed minutes for fresh trading opportunities in the pair.
USD/JPY: Technical outlook
“The pair now seems poised to surpass the 113.00 round-figure mark and climb further towards testing the next relevant hurdle near the 113.55-60 region. On the flip side, any meaningful pullback might be seen as a buying opportunity and remain limited near the 112.25-112.00 region,” explains FXStreet’s Analyst Haresh Menghani.
