The USD/JPY currency pair has shown signs of recovery after selling off in late 2022. In the afternoon of the New York session, USD/JPY rallied more than 0.5%, reaching 134.90, just below the crucial psychological level of 135.00. The DXY index also advanced moderately, maintaining six-week highs. The rally was supported by risk-off sentiment and increasing US Treasury yields.
Traders had previously anticipated a pause in the Fed’s hiking cycle during Q1 2023, with rate cuts likely in H2. However, strong employment numbers and sticky CPI data have changed the outlook. The US labor market has proven to be more resilient than predicted, raising the risk of wage pressures remaining skewed to the upside. Meanwhile, the inflation outlook has started to evolve less favorably than projected, with stubbornly high prices in the services sector. The Fed may, therefore, be compelled to continue raising interest rates in the coming months, preventing any monetary policy pivot.
As the Fed’s terminal rate steadily increases, currently at 5.35%, the US dollar may continue its recovery, particularly against low-yielders like the Japanese yen. This means that the USD/JPY could see more upside this month before price action consolidates.
USD/JPY Likely to Continue on Rally
In summary, USD/JPY has shown positive signs of recovery and is likely to continue rallying toward the resistance level of 135.00. The rally is supported by risk-off sentiment and rising US Treasury yields, coupled with changing expectations of Fed monetary policy. As the Fed’s terminal rate continues to rise, the US dollar could extend its recovery further, particularly against low-yield currencies like the Japanese yen.
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