- USD/JPY regains positive momentum on Friday amid aggressive USD buying.
- The USD hit a fresh 20-year high amid bets on faster rate hikes by the Fed.
- Fed-BoJ policy divergence supports prospects for further near-term gains.
The USD/JPY pair attracting buys near 141.75 on Friday, building on an overnight rebound from more than two-week lows. Spot prices are recovering daily highs during the first half of the European session, although they are quickly retreating towards the 143.00 mark in the last hour.
An overnight sharp reaction to an intervention by Japanese authorities to stem a rapid slide in the Japanese yen proved short-lived amid strong bullish sentiment around the US dollar. In fact, the USD index, which measures the dollar’s performance against a basket of currencies, is hitting a fresh 20-year high and continues to draw support from rising bets for more aggressive Fed rate hikes. This is proving to be the key factor behind the slight rise in the USD/JPY pair.
It’s worth recalling that the Fed struck a hawkish tone on Wednesday, signaling that it would move to raise rates more aggressively to curb stubbornly high inflation. This continues to support higher US Treasury yields and continues to act as a drag on the dollar. The yield on the peace-sensitive two-year U.S. Treasury note touched a fresh 15-year high and the benchmark 10-year Treasury note jumped to its highest level since 2011 on Thursday.
The Bank of Japan (BoJ), on the other hand, aggressively defended its yield curve ceiling and reaffirmed its commitment to ultra-low interest rates rates on Thursday. This results in a widening of the US-Japan rate differential, weighing on the Japanese yen and offering further support to the USD/JPY pair. This means that the prevailing risk-on environment is helping to limit losses in the safe-haven JPY, limiting upside in the major, at least for now.
This means that the Fed-BoJ policy divergence, which has been a key factor in the yen’s more than 25% fall against the USD since the start of 2022, suggests that the path of least resistance for the USD/JPY pair is to the upside. . Market participants are now looking forward to US PMI prints as a boost ahead of Fed Chair Jerome Powell’s speech. Traders will continue to look to US bond yields and broader risk sentiment to seize near-term opportunities.