USD/JPY Entrenched in Strong Uptrend amid Hawkish Powell

USD/JPY OUTLOOK:

• USD/JPY resumes its advance and rises to its best levels since November 2022
• The U.S. dollar draws support from higher Treasury yields following hawkish comments from the Fed chair at a Congressional hearing
• Powell says that the fight against inflation “has a long way to go” and that “nearly all FOMC participants” expect to hike rates again this year

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USD/JPY rebounded on Wednesday after a subdued performance in the previous session, boosted by climbing U.S. Treasury yields following hawkish comments from the Federal Reserve chairman at a congressional hearing. In late morning trading, the pair was up about 0.60% to 142.36, reaching its best level since November 2022.

Powell appeared before the U.S. House Financial Services Committee today to present the central bank’s “Semiannual Monetary Policy Report.” In prepared remarks, the Fed chairman said that the fight against inflation “has a long way to go” and that “nearly all FOMC participants” expect to raise borrowing costs somewhat further by the end of the year.

Powell’s testimony suggests that policymakers remain determined to restore price stability and intend to resume hikes soon after a brief pause, even if markets appear skeptical of those plans. The possibility that the upper bound of the terminal rate will drift toward 5.75% during the second half of 2023 should keep bond yields skewed to the upside, supporting the U.S. dollar.

With the Fed still on the offensive, there is room for USD/JPY to extend its near-term advance. In a rising interest rate environment, the Japanese yen will remain a pariah among G-10 currencies, especially after the BoJ doubled down on its ultra-loose stance at its June meeting, indicating little appetite to abandon expansionary policies for now.

However, there is a potential risk to the previous thesis. If the yen’s depreciation were to escalate rapidly, Japanese authorities may be forced to intervene in the FX space to curtail rampant speculative activity. Last year, the government stepped in by selling U.S. dollars when the exchange rate breached ¥146.00 and ¥152. Traders should exercise caution if these levels come back into play.

USD/JPY TECHNICAL ANALYSIS

USD/JPY breached the upper limit of a symmetrical triangle pattern last week, an event that reinforced upward impetus and created the right conditions for a rally toward multi-month highs today.

With momentum on its side, the pair’s path of least resistance is likely to be higher, but to be confident about the constructive outlook, a sustained move above 142.50 is needed. This technical barrier corresponds to the 61.8% Fibonacci retracement of the October 2022/January 2023 decline. If the bullish breakout scenario plays out, buying interest could gather pace, paving the way for a climb toward the psychological 145.00 handle.

On the flip side, if sellers resurface and trigger a bearish reversal, initial support stretches from 140.80/140.50. If this floor is taken out, we could see a pullback toward 139.30.

USD/JPY TECHNICAL CHART

USD/JPY Technical Chart Prepared Using TradingView