USD/JPY Forecast: US Debt Limit Bill Passage, Fed’s Rate Hike Decision Eyed

Highlights

• Dollar/Yen up due to rising US government debt yields.
• Approval of US debt limit bill and potential consequences.
• Focus on US Federal Reserve’s rate hike probability and Japan’s currency management.

Overview

On Thursday, the Dollar/Yen is up because the interest rates on U.S. government debt increased. This widened the spread between US Government bond yields and Japanese Government bond yields, making the U.S. Dollar a more attractive investment.

At 07:27 GMT, the USD/JPY is trading 139.854, up 0.519 or +0.37%. On Wednesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $66.80, up $0.19 or +0.28%.

Debt Limit Bill Spurs Treasury Yield Surge

The approval of the bill to increase the U.S. debt limit in the House of Representatives and its advancement to the Senate has caused Treasury yields to rise. This is a significant development as it comes just before the approaching deadline for default. The bill received bipartisan support, marking the end of weeks of intense negotiations between the White House and Republican House Speaker Kevin McCarthy. Senate Majority Leader Chuck Schumer and President Joe Biden have both expressed the importance of passing the bill quickly. While McCarthy celebrated the passage as a personal victory, some Republicans were dissatisfied with the outcome, as the bill received more Democratic votes than Republican votes.

The urgency to raise the debt ceiling is driven by the potential consequences of a U.S. debt default. Such a default could lead to disruptions in financial markets, job losses, and the risk of losing government benefits for millions of Americans. The bill, a result of a deal between McCarthy and Biden, aims to avoid this crisis by extending the debt ceiling beyond the next presidential election and into 2025.

Investors Monitor Fed, Rate Hike Possibility

In addition to the debt ceiling agreement, investors in the Dollar/Yen pair are closely monitoring the actions of the U.S. Federal Reserve to gauge the likelihood of a rate hike in June. Fed officials, including the vice chair-designate, have indicated a possibility of skipping a rate hike in June to assess the impact of previous tightening measures in the face of persistent inflation. Market expectations for a rate hike have decreased, with the CME FedWatch tool showing a roughly 38% chance of a 25 basis point rate increase at the upcoming meeting.

BOJ Officials Monitoring Dollar’s Strength

Meanwhile, the Japanese Yen has strengthened against the Dollar as Japan’s financial authorities address the Yen’s recent decline to a six-month low. Japan’s commitment to closely monitoring currency movements and considering various options reflects their dedication to managing the value of their currency.

On the domestic front, a private survey revealed that Japan’s factory activity expanded for the first time since October 2022. The positive manufacturing purchasing managers’ index indicates a turnaround in the country’s manufacturing sector performance and suggests a recovery in Japan’s domestic economic conditions. This recovery has been supported by increased client spending, which has helped offset subdued demand in key export markets.

Technical Analysis

The USD/JPY is currently trading in between 142.216 (R1) and 137.859 (PIVOT), indicating the main trend is up, but momentum is trending lower.

Since the main trend is up, buyers are likely to come in on a test of 137.859 (PIVOT). However, if it fails then look out to the downside. This could trigger a near-term acceleration into 134.783 (S1).

If the pivot holds as support then prices are likely to climb over the near-term into 142.216 (R1). Look for counter-trend sellers on the first test of this level.

Resistance & Support Levels