USD/JPY Forecast: Underpinned by Higher Treasury Yields, Fed’s Hawkish Tone

Highlights

• Dollar/Yen falls despite strong U.S. banking results
• U.S. Treasury yields rise after U.K. inflation report
• Fed officials signal potential interest rate hikes

Overview

The Dollar/Yen is edging lower on Thursday despite strong U.S. banking results which firmed up expectations that the Federal Reserve will keep monetary policy tight for a while longer. During the previous session, the Forex pair traded above 135 for the first time in a month.

At 08:02 GMT, the USD/JPY is trading 134.625, down 0.092 or -0.07%. On Wednesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $69.09, down $0.38 or -0.55%.

Easing Concerns about Potential Financial Crisis

Morgan Stanley announced a Q1 profit that exceeded expectations on Wednesday. This joins other major U.S. banks in producing positive results. The results have eased concerns about a potential financial crisis following the recent failures of Silicon Valley Bank and Signature Bank.

These results indicate that the U.S. bank funding situation is stabilizing, which is contributing to the strengthening of the dollar. In addition, with the slightly hawkish tone of the Federal Reserve, the market is beginning to adjust its expectations for any potential rate cuts this year.

UK Inflation Report Spurs Rise in US Treasury Yields and Rate Hike Expectations

U.S. Treasury yields rose on Wednesday after a higher-than-expected inflation report in the U.K., raising concerns that global central banks will continue their tightening campaigns.

Traders increased their bets on the Federal Reserve raising rates at its next meeting following the U.K. report, with an 83% chance of a quarter-point increase, according to CME Group’s FedWatch tool.

A Reuters poll also predicts that the U.S. central bank will increase rates by 25 basis points in May and then maintain steady rates throughout 2023.

Fed’s John Williams: Inflation Problematic, Central Bank to Take Action

On Wednesday, Fed Bank of New York President John Williams stated that inflation is still at problematic levels, and the U.S. central bank will take action to lower it.

Some Fed officials, including Atlanta Fed President Raphael Bostic, have recently suggested that interest rates could continue to rise, with Bostic anticipating a 25 basis point hike after the next central bank meeting.

Traders Await U.S. Manufacturing, BOJ Meeting, and FOMC

In other news, traders are anticipating further cues from U.S. manufacturing data on Friday, the Bank of Japan’s meeting next week, and the Fed’s Open Market Committee early next month.

Technical Analysis

From a daily technical viewpoint, the USD/JPY is trading on the strong side of its daily pivot at $133.423. However, it is also under the R1 level at $137.245. The long-term technicals appear to be in favor of an upside move, but the short-term outlook indicates potential weakness.

A sustained move over the pivot at 133.443 will indicate the buying is getting stronger. This could lead to a near-term acceleration into R1 at 137.245. However, a sustained move under the pivot at 133.443 will put the USD/JPY in a weak position with S1 coming in at 128.973.

Support and Resistance 

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