The US dollar has edged higher at the start of the week. In the European session, USD/JPY is trading at 114.56, up 0.36% on the day. The yen is coming off its best week since November 2020, with USD/JPY falling by 1.15% last week.
US Treasury yields have taken the yen on a roller-coaster ride. Earlier this month, USD/JPY punched above the 1.16 line, as 10-year US Treasury yields were on a roll and climbed above 1.70%. The yield rally ran out of steam last week, allowing the yen to recover. The yen is very sensitive to the US/Japan rate differential, which has been the driver behind the yen’s volatility. The 10-year yield is currently at 1.79%, a whisker below the 52-week high of 1.80%. If the 10-year yield resumes its upswing, I would expect USD/JPY to follow suit.
The Bank of Japan holds a policy meeting on Tuesday. The bank is expected to maintain its ultra-easy policy, which sounds like business as usual for the BoJ. However, in what could be a significant development, the bank is expected to revise upwards its inflation view for the first time since 2014. Inflation is much lower than the surging levels we are seeing in the US and UK, but the upswing in inflation is significant, given that Japan has grappled with deflation for years. The BoJ has been quietly tapering its bond purchases, and the bank could eventually raise interest rates even if the bank’s inflation target of 2% is not met. The BoJ does not have any plans to raise interest rates, but if inflation continues to rise, bank policymakers will have to begin considering raising rates, which until recently would have been considered almost outlandish.
- There is resistance at 115.54 followed by 116.88
- There is support at 113.18 and 112.16
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