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USD/JPY Forecast: Increased Demand for Safe-Haven Assets Boosts Dollar’s Outlook

By:
James Hyerczyk
Published: May 25, 2023, 10:18 GMT+00:00

The USD/JPY's strength is being driven by higher Treasury yields, reduced expectations for Fed rate cuts and safe-haven demand.

USD/JPY

In this article:

Highlights

  • Dollar/Yen reaches highest level since November 30.
  • Factors driving dollar’s strength: higher Treasury yields, reduced rate cut expectations.
  • Increased demand for safe-haven assets supports dollar’s upward movement.

Overview

The Dollar/Yen is edging higher on Thursday, testing its highest level since November 30.

At 10:00 GMT, the USD/JPY is trading 139.545, up 0.178 or +0.13%. On Wednesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $66.80, down $0.39 or -0.58%.

Supported by Favorable Interest Rate Differential

This upward movement is fueled by several key factors driving the dollar’s strength. Firstly, higher Treasury yields have widened the spread between U.S. Government bonds and Japanese Government bonds, making the dollar a more appealing asset compared to the yen.

Traders Trim Fed Rate Hike Expectations

Additionally, expectations for Federal Reserve rate cuts have been reduced as the U.S. economy has shown resilience in the face of the central bank’s aggressive tightening campaign. Money market traders have adjusted their predictions, now anticipating only a quarter-point rate cut in December instead of the previously projected 75 basis points.

Hawkish Fed Officials Boost Dollar

Moreover, a hawkish stance from several Fed officials, supported by consumer inflation running above the 2% target, has further boosted the dollar. Odds for another quarter-point rate hike in June have increased to about 1-in-3.

Dollar/Yen Outlook Remains Bullish

In the short term, the outlook for the dollar remains bullish. Market sentiment has shifted over the past two weeks in favor of the dollar, with the expectation of further upward movement.

Additionally, amidst the ongoing debt ceiling standoff in the United States and concerns about economic slowdowns in China and Europe, there has been an increased demand for safe-haven assets, providing additional support for the dollar.

There is a potential for the dollar to experience a further 2% upward movement, and the recent negative watch on the United States’ “AAA” debt ratings by Fitch could potentially act as a trigger for this increase.

In conclusion, the dollar’s strength against the Japanese yen is driven by higher Treasury yields, reduced expectations for Federal Reserve rate cuts, and increased demand for safe-haven assets.

In the short term, a bullish outlook is expected, with the potential for the dollar to rise by an additional 2%. However, the final decision on rate hikes will depend on upcoming data, particularly regarding inflation trends.

Technical Analysis

Daily USD/JPY

The USD/JPY is hovering near its highest level since November 30 after overcoming 138.452 (R1). This level is new support.

A sustained move over 138.452 (R1) could generate the momentum needed for a near-term surge into 140.498 (R2).

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

Resistance & Support Levels

S1 – 132.471 R1 – 138.452
S2 – 128.537 R2 – 140.498
S3 – 126.491 R3 – 144.432

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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