USD/JPY: Bullish momentum has stalled, but uptrend intact until Fed blinks

As my colleague Joe Perry noted last week, most central banks are expected to raise interest rates, in some cases dramatically, in the coming year in their fight against inflation.

The biggest outlier to this trend is the Bank of Japan, which is still actively easing monetary policy in an effort to stoke inflationary pressures amid a rapidly aging populace. It is notable that Japan’s “core” CPI (excluding fresh food and energy prices) rose above 0% for the first time since 2020 last month, but regardless, traders are still pricing in just an outside chance of even a single 25bps rate hike from the BOJ in the next year, dramatically lower than the 200-300bps of rate increases expected from most other central banks.

On a day-to-day basis, changes in US treasury yields tend to drive the USD/JPY exchange rate. As the yield on the benchmark 10-year treasury bond has lost its upside momentum and spent the last month consolidating around 3.00%, so too has the huge March-April rally in USD/JPY stalled:

Source: StoneX, TradingView

Looking ahead, expectations for FOMC policy will be a major driver for USD/JPY. Until Jerome Powell and company hint that interest rates increases will slow down or the Japanese economy starts to see meaningful inflation (both appear unlikely any time soon), USD/JPY should be well supported.

As we go to press, the key support level to watch is the 1-month low near 127.00; as long as rates hold above that area, the momentum remains with the bulls for a potential break to fresh 20-year highs above 131.25. To the topside, the next major level of resistance comes in around 135.00, which marks the highest level the pair has traded at since 1998.

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