Despite continued USD trading, the USD/JPY gained ground for the second day in a row on Tuesday. The relatively secure Yen was underpinned by the wary market attitude and had its upside potential curtailed. At the beginning of the European session, the USD saw some fresh bids, which helped to drive the USD/JPY cross back nearer to the 114.10–15 region, which corresponds to the one-week highs reached earlier this Thursday.
USD/JPY CHART Source: Tradingview.com
For the second consecutive day, the duo capitalized on the previous day’s stronger-than-expected US CPI-inspired rise of approximately 125 pips from the one-month pullback, and it edged up for the second time. The strong bullish attitude towards the US currency, which has persisted in the face of expectations of an early policy hardening by the Federal Reserve, has been the sole source of the momentum. It will be smart to hold off on positioning for any additional appreciating rise until there is significant follow-through purchasing beyond the 114.40-50 zone since the RSI on intraday charts is somewhat overbought.
An Overview Of The Fundamentals
Consumer prices in the United States grew at the fastest annual rate since 1990 October, igniting speculation that the Federal Reserve will employ a more radical policy response to limit rising inflationary pressures in the coming months. In reality, the Fed’s funds stock market indicates that the first-rate increase might take place as early as July 2022, which has continued to function as a positive force for the greenback against the other major currencies.
On the other hand, the rebalancing of the expected timetable for an impending Federal Reserve rate hike, on Wednesday, caused a significant spike in the returns of US Treasury bonds. This was seen to be yet another aspect that contributed to the strengthening of the USD/JPY pair. Nonetheless, the cautious market tone supported the relatively secure Japanese Yen and prevented it from gaining any additional ground, at least for the time being.
Aside from that, traders were discouraged from placing aggressive wagers due to a lack of liquidity following a bank holiday in the United States. Following the re-election of the LDP, analysts predicted that the government would implement another wave of fiscal stimulus. It is anticipated that the weakening of Q3 GDP will give way to a strong rebound in Q4 GDP as the economy re-opens, but the augmentation of yield curve regulation will result in a significant widening of USTJGB 10 year spreads, supplying the rationale for continued outflows of capital seeking higher returns overseas.
One danger associated with a weaker Yen situation that should be kept an eye on is the sheer magnitude of JPY short positions currently in existence. The magnitude of the position skew increases the likelihood of a JPY corrective rally if risk sentiment continues to deteriorate considerably through the end of the year, but experts still expect the Yen to weaken in the medium term through 2022.