The greenback was broadly higher on Wednesday, pushing the USD/JPY pair to three-month highs at 111.50, where the current bull market cycle highs are located. Should the USD continue through this resistance, the long-term uptrend might be renewed.
Hawkish Powell again
On Tuesday, markets focused on the Fed Chair Jerome Powell testimony. He seemed to hint that the shift in inflation is not just ‘transitory’ but could be ‘structural,’ leading to the repricing of the expectations for even more hawkish for Fed action . As a result, there is now a greater than 50% probability of a rate hike in September 2022, up from the 30% just a week ago . Later in the session, the second day of Jerome Powell’s testimony occurs, and volatility could be elevated throughout and after the event.
Additionally, ECB President Christine Lagarde will participate in a virtual panel discussion titled “Policy panel” at the ECB Forum on Central Banking. The BoE’s Bailey and the BoJ’s Kuroda will also speak at the conference, possibly influencing the financial markets.
Lastly, US pending homes sales figures will be released, but these data rarely impact the FX market.
Rising yields support higher USD/JPY
The USD/JPY pair is generally tightly correlated to the US yields. Since the 10-year yield rocketed from 1.3% to 1.55% in a matter of days, the USD/JPY pair also jumped higher.
As long as the 10-year yield defends the 1.5% level, the short-term outlook appears bullish for yields , targeting the 1.7% from the medium-term perspective, most likely pushing the USD/JPY pair toward the 115 level.
However, should the yield correct to the next support at 1.39%, it could lead to profit-taking in USDJPY, possibly dragging it lower to 110.50.
With US yields having completed near-term bases and expected to rise further, we continue to look for a test on long-term resistance, starting at the 111.66 June YTD high and stretching up to the 2019 and 2020 highs at 112.40 and 112.23 respectively,
From other news, Japanese Prime Minister-elect Fumio Kishida said on Wednesday that he would strive to achieve economic growth and distribution. Also, Japan must continue to do everything to prevent the spread of coronavirus.
As of importance also was the latest Bank of Japan announced that it bought 70 billion JPY of ETFs Wednesday , directly intervening in the markets for the first since June 21. As the bull market in stocks has become the official goal of central banks, they need to start buying stocks in times of panic selling.