USD/JPY Fails At Resistance And Pivots Lower, But The Underlying Trend Remains Bullish

The hawkish bias adopted by the Federal Reserve has somewhat changed the narrative and created a more favorable environment for the US Dollar, especially against low-yielding currencies such as the Japanese yen. In its June monetary policy decision, the FOMC left its benchmark interest rate and quantitative easing (QE) program unchanged but signaled two rate hikes for 2023 amid rising inflationary pressures and optimism about the state of the recovery. In the press conference, the bank also stated that preliminary discussions on reducing its bond-buying program had begun, although it stressed that the conversation was at an early stage and that more inroads toward "substantial further progress" were needed before advancing the debate.

The hawkish shift by the central bank triggered a spike in nominal rates, lifting the US 2-year treasury yield roughly 9 bps above 0.2%, its highest level in 12 months. The US 10-year yield also jumped, although the move has since reversed. The rate repricing provoked an initial strong bullish move in the USD/JPY, pushing its price to 110.82, the highest mark since last April. Today, however, the pair has retraced some of the Fed-induced gains but remains biased to the upside in light of the latest developments.

One of the key takeaways from the FOMC meeting is that policymakers appear more upbeat about the recovery outlook and somewhat uneasy about rising consumer prices, with Chairman Powell acknowledging for the first time that “inflation could turn out to be higher and more persistent than expected”. In the coming weeks, improvements in the labor market and high inflation outcomes may bring forward the tapering timeline or, at the very least, strengthen the argument for the need to start reducing asset purchases sooner rather than later. This may accelerate the transition to higher rates at the long end of the curve, supporting the dollar.

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