- USD/JPY is recovering as US yields and oil prices rise, while a potentially hawkish Fed and BoJ keep the pair volatile.
- A sustained break above 155 could open the way toward 156–157, while failure to hold the area could send the pair back toward 153 and 152.10.
- The key catalysts are the Fed decision, BoJ policy, and whether elevated oil prices and Treasury yields persist.
The was little changed ahead of the FOMC after it managed to extend its recovery to around 155.00 on Tuesday. The pair has been recovering from a seven-month low, as US Treasury yields and oil prices have been pushing higher and investors are positioned for a potentially more hawkish Federal Reserve rate decision.
Meanwhile, the potential for a hawkish Bank of Japan surprise has limited the USD/JPY’s upside for now, relative to other FX major pairs.
Still, the US dollar yen exchange rate could turn decisively bullish if oil continues to press higher and yields don’t fall back. That’s, of course, barring a major surprise with the Fed (e.g., holds rates rather than hike) or BOJ (e.g., hikes 50 instead of 25 bps).
Rising Yields and Oil Keep USD Supported Ahead of FOMC
The latest global bond sell-off is becoming increasingly important for USD/JPY. This week, have pushed above 5% for the first time since 2007, as surging energy prices, persistent inflation concerns and heavy government borrowing continue to unsettle fixed-income markets. For the yen, the resulting rise in US-Japan yield differentials is an obvious headwind, which is helping to drive the USD/JPY higher again after the recent intervention-related drop.
The dollar, meanwhile, has also started to benefit from several forces moving in the same direction: firmer front-end rates, elevated oil prices and a softer risk backdrop.
Now, the focus is turning to the Federal Reserve’s decision which is the most important macro event on the economic calendar today.
The Fed is now widely expected to raise rates by 25 basis points on Wednesday, with the more important question being whether policymakers validate expectations for another increase later in the year. The renewed oil shock means there is no case for easing any time soon, and that could keep the dollar supported for a long time – especially if incoming inflation or inflation expectations both remain sticky.
Bank of Japan is the Key Risk
The Bank of Japan, meanwhile, is also expected to follow with a 25bp hike on Friday. But much of the move is already priced in, leaving the yen dependent on the guidance that accompanies it. Unless there is a surprise 50 basis point hike or Governor Ueda signals STRONG confidence in a faster tightening cycle, the BoJ decision may struggle to provide lasting support for the currency.
That leaves USD/JPY outlook vulnerable to a familiar dynamic: a hawkish Fed could encourage investors to rebuild dollar-yen positions, while a less convincing BoJ risks disappointing yen bulls.
Technical Analysis and Key Levels to Watch
From a macro viewpoint, the balance of risks remains tiled to the upside for the USD/JPY outlook. But will the technical analysis confirm that view this week?
The USD/JPY has recovered towards 155.00 for now, after gaining sharply from its recent lows. A clean break above this key area (namely 155.00 to 153.30) could target a continuation move towards 156.00-157.00 area, which looks increasingly plausible if Treasury yields remain elevated.
A sustained break above 157.00 could see the pair climb all the way to tests the larger resistance area between 158.00 to 158.60 zone.
However, if for whatever reason the USD/JPY fails to break back above 155.00 area or fails to hold above that zone after a temporary break higher, then we could see a revisit of the 153.00 level, and possibly even the calendar year-to-date low of 152.10 area.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.
