USD/JPY Fundamental Daily Forecast – Surges to Four-Year High on Faster Rate Hike Expectations

The Dollar/Yen is trading lower on Tuesday after giving back earlier gains. Shortly after the opening the Forex pair broke through the 115 area for the first time in nearly five years before profit-takers came in at 115.154.

At 10:03 GMT, the USD/JPY is trading 114.768, down 0.101 or -0.09%.

The dollar hit a new four-and-a-half year high against the yen following Monday’s solid gains after Federal Reserve Chair Jerome Powell was renominated for a second term, reinforcing bets that U.S. interest rates would rise next year and diverge from Japan’s.

“We expect the week Japanese Yen narrative to continue finding support amid attention to monetary policy divergence,” Barclays analysts said in a note.

Technically, the next major upside targets are the March 10, 2017 main top at 115.501 and the January 19, 2017 main top at 115.615. Above these levels there is no clear resistance until 118.700 (the late 2016 high).

Biden Chooses Powell over Brainard

U.S. President Joe Biden chose Powell over the other leading candidate Lael Brainard, whom markets consider to be the more dovish of the two, though Brainard will be Fed vice chair.

The news reinforced market expectations of rate hikes next year when the central bank finishes tapering its emergency bond buying program.

The price action suggests investors are comfortable with Powell’s nomination and the notion that he will lead the Fed to begin pricing in rate hikes from July next year. This idea was supported by comments from at least three officials last week who opening discussed ramping up the pace of tapering too.

As Inflation Surges, Fed to Debate Faster Taper, Earlier Rate Hikes

While the nomination of Powell triggered the latest price surge by the USD/JPY, the Forex pair is likely to continue to be supported the notion of a faster tapering of Federal Reserve stimulus.

Federal Reserve policymakers are publically debating whether to withdraw support for the U.S. economy more quickly to deal with surging inflation, with one of the central bank’s most influential officials signaling last Friday that the idea will be on the table at the Fed’s next meeting in mid-December.

Short-Term Outlook

The Japanese Yen is sensitive to moves in U.S. Treasury notes, and two-year U.S. Treasury yields rose 8.5 basis points on Monday to their highest since early March 2020. They last yielded 0.5924%, little changed in Asian hours.

That being said, the direction of the Dollar/Yen is likely to be controlled by the spread differential between U.S. Government bonds and Japanese Government bonds until the Fed’s next meeting in mid-December.

With the Bank of Japan holding rates steady and the Fed likely to speed up tapering and the timetable of its first rate post-pandemic rate hike, the near-term advantage continues to support a strong U.S. Dollar.