USD/JPY Forecast: Lower as US Debt Ceiling Deal Fuels Investor Optimism

Highlights

• Dollar/Yen retreats as US debt ceiling suspension boosts risk appetite.
• US dollar briefly reached a six-month high against the yen before declining.
• Agreement requires approval from both House and Senate, creating uncertainty.

Overview

The USD/JPY is edging lower on Monday, stepping back from its highest point in six months. This shift is due to an agreement reached between US President Joe Biden and House Speaker Kevin McCarthy to temporarily suspend the US debt ceiling until January 1, 2025, which has increased investors’ appetite for risk and reduced the appeal of the US dollar as a safe-haven currency.

During Asian trading, the dollar briefly reached a six-month peak of 140.917 yen, but it has since declined and is currently around 0.25% lower at 140.262 yen.

US Dollar’s Safe-Haven Status Declines

The decline in the US dollar’s safe-haven status is a result of the positive news from Washington, which has led to a rally in global stocks. However, trading activity is generally subdued as parts of Europe, including Britain, are on holiday, and it is also a public holiday in the United States.

While the initial reaction to the agreement is positive, there is a realization that this is just one step in the process. Both the House and Senate need to approve the agreement by June 5, which is still a challenging task.

The agreement includes the suspension of the debt limit until January 1, 2025, spending limits for the 2024 and 2025 budgets, reclaiming unused funds from COVID-19 relief programs, expediting the approval process for certain energy projects, and implementing additional work requirements for food assistance programs for low-income Americans.

USD/JPY Strong Amidst Rising Yields

The USD/JPY started the trading session on Monday in a strong position. Meanwhile, the Japanese yen has experienced a decline recently, largely influenced by the increasing yields on US Treasury bonds. This is due to growing speculation that interest rates in the United States will remain higher for an extended period.

On Friday, economic data revealed that consumer spending in the US exceeded expectations in April, and there was an uptick in inflation, indicating a resilient economy. As a result, yields on US Treasuries surged, with the two-year yield reaching a two-month high of 4.639%, reflecting expectations of near-term interest rate changes.

Dollar’s Outlook Hinges on Payrolls Report

Due to the Memorial Day holiday in the US, cash US Treasuries were not traded in Asia on Monday. However, futures remained relatively stable, with a 10-year futures’ implied yield of 3.84%.

The sustainability of the dollar’s rally will depend on various factors, including upcoming data on wages, average earnings in the Friday payrolls report, and the Consumer Price Index (CPI) before the Federal Reserve meeting. There is still a significant amount of data to be analyzed before reaching the June meeting.

According to the CME FedWatch tool, money markets are currently pricing in a nearly 68% probability of a 25 basis points rate hike by the Fed in June. This is a significant increase from the approximately 17% probability estimated a week ago.

Technical Analysis

The USD/JPY is trading a little under 140.498 (R2) after a failed attempt to breakout over this level.

A sustained move over 140.498 (R2) will signal the return of buyers. If this is able to generate enough upside momentum then we could see a near-term acceleration into 144.432 (R3).

A sustained move under 140.498 (R2) will indicate the selling pressure is getting stronger. This could lead to a near-term test of 138.452 (R1)

Resistance & Support Levels