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USD/JPY Fundamental Daily Forecast – Supported by Early Fed Rate Hike Expectations

By:
James Hyerczyk
Published: Jan 4, 2022, 10:45 UTC

The USD/JPY could continue to rise on expectations of an earlier rate hike by the Fed in March, soon after the end of its bond-buying taper.

USD/JPY

In this article:

The Dollar/Yen is testing its highest level since January 2017 on Tuesday on expectations of an earlier-than-expected rate hike by the U.S. Federal Reserve.

The sharp rise in U.S. Treasury yields the previous session widened the spread between U.S. Government bond yields and Japanese Government bond yields, making the U.S. Dollar a more attractive investment.

The catalyst behind the strength in the Dollar/Yen is the divergence between the hawkish U.S. Federal Reserve and the dovish Bank of Japan (BOJ).

At 10:15 GMT, the USD/JPY is trading 115.834, up 0.482 or +0.42%. On Monday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $81.30, down $0.19 or -0.23%.

Global Yields Rise, Led by Jump in U.S. Rates

U.S. Treasury yields soared on Monday in relatively thin trading, with several markets closed, as investors braced for what could be an earlier-than-expected interest rate hike by the Federal Reserve. The jump in yields strongly suggests investors are downplaying any impact on the economic recovery by surging Omicron infections.

The sharp rise in COVID infections was outweighed by inflation fears, with some investors believing the Fed could raise rates in March soon after it completes tapering of its bond purchases.

“It looks like the March meeting is in play on rate hikes. I think that’s a little aggressive, but when you look at inflation, it continues to look bad,” said Stan Shipley, fixed income strategist at Evercore ISI in New York.

“There is no sign that inflation is moderating,” Shipley said. “We’ll get December inflation in a week or two, and it’s going to be over 7%.”

The rise in U.S. yields spread to other government issues despite financial markets being closed due to holidays in Britain, Japan, China and Australia.

Japanese government bond yields rose on Tuesday, tracking U.S. Treasury yields higher overnight. The 10-year JGB yield rose one basis point to 0.080% and the 20-year JGB yield rose 0.5 basis points to 0.480%.

Short-Term Outlook

The USD/JPY could continue to rise on expectations of an earlier rate hike by the Fed in March, soon after the end of its bond-buying taper.

Citing high U.S. inflation and a job market that’s nearing its full potential as least while the COVID-19 pandemic continues, investors are now pricing in an interest rate hike soon after the central bank ends its bond-buying program in March.

Futures on the federal funds rate on Monday have priced in a roughly 70% chance of a quarter percentage-point tightening by March, fully pricing that scenario by May.

Traders are waiting for Friday’s U.S. Non-Farm Payrolls report before possibly jumping all in on a March rate hike.

For a look at all of today’s economic events, check out our economic calendar.

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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