USD/JPY Forecast: Dollar Touches 6-Month High Against Yen

USD/JPY Highlights

• Dollar strengthens against yen, influenced by contrasting central bank policies.
• Federal Reserve hints at further monetary tightening.
• Debt ceiling deadline adds uncertainty and potential market volatility.

USD/JPY Overview

The dollar touched a six-month high against the yen on Tuesday, reflecting the contrast between a still-hawkish Federal Reserve and an ultra-dovish Bank of Japan. However, the Dollar/Yen couldn’t maintain those gains and declined.

At 09:19 GMT, the USD/JPY is trading 138.277, down 0.301 or -0.22%. This is down from an intraday high of 138.840. On Monday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $67.19, down $0.31 or -0.46%.

Fed Heavyweights Hint at Tighter Monetary Policy

Amid a slew of Federal Reserve heavyweights speaking on Monday, some hinted at further tightening of monetary policy. Minneapolis Fed President Neel Kashkari suggested that U.S. rates may need to go above 6% for inflation to reach the Fed’s 2% target, while St. Louis Fed President James Bullard mentioned the possibility of another half-point rate increase this year.

Markets Expect Higher Chance of Fed Rate Hike

Money markets are currently pricing in a higher likelihood of the Fed delivering another 25-basis-point rate hike next month compared to the previous week, according to the CME FedWatch tool. Expectations of interest rate cuts later in the year have also been reduced, with rates predicted to remain around 4.7% by December.

Debt Ceiling Concerns Dampen Investor Sentiment

Concerns over the approaching U.S. debt ceiling deadline have been weighing on investors’ minds, dampening risk sentiment and bolstering the safe-haven status of the U.S. dollar. President Joe Biden and House Speaker Kevin McCarthy ended discussions without an agreement on how to raise the debt ceiling, leaving just 10 days before a possible default.

The policy disagreements among lawmakers have created a tense atmosphere as the debt ceiling deadline approaches. Short-end U.S. Treasury yields have risen, indicating market jitters, with the yield on the one-month Treasury bill experiencing a significant increase. The yield on the two-month Treasury bill also rose but not as sharply as the one-month bill.

Short-Term Outlook

Given the current expectations of the Federal Reserve maintaining higher rates for longer and the reduced likelihood of rate cuts, the dollar may continue to experience support against the yen. The unresolved debt ceiling issue adds uncertainty and could contribute to market volatility in the near term. It is crucial to monitor any developments related to the debt ceiling deadline as they could have significant implications for the financial markets.

Technical Analysis

The USD/JPY is trading lower after hitting a six-month high earlier in the session.  The rapid downturn may have reestablished 138.452 (R1) as resistance. This price is likely to act like a pivot over the near-term although the “real” PIVOT is 134.518.

A sustained move over 138.452 will indicate the presence of buyers. If this is able to generate enough upside momentum then we could see a near-term surge into 140.498 (R2).

A sustained move under 138.452 will signal the presence of sellers. However, as long as 134.518 (PIVOT) remains intact, the long-term bias will be to the upside.

Resistance & Support Levels