Yesterday's climax in the Forex market was the loud return of the US currency to growth. Unexpected plot twist thanks to hawkish comments from US Federal Reserve officials.
A retrospective of the USD fall
The dollar has not been in the best shape over the past few sessions. The main reason for its weakness was increased doubts about the continuation of aggressive rate hikes by the Fed.
Recall that last week, the US central bank, as part of the fight against high inflation, raised rates by 0.75% for the second time in a row.
This brought the indicator even closer to the neutral level, which caused speculation about a possible slowdown in the pace of tightening of the Fed's monetary policy in the near future.
The probability of such a scenario sharply collapsed the yield of 10-year US government bonds, after which the greenback rushed down.
The USD/JPY pair has suffered the most from the general weakness of the dollar these days, which since the beginning of the year, on the contrary, has shown steady growth on the divergence of the monetary policy of Japan and the United States.
Following the results of the last five sessions, the currency pair fell from its July high (139) by more than 6%, and yesterday morning the dollar fell against the yen to an alarming level of 130.39.
Against this background, many analysts were quick to present very negative forecasts for the USD/JPY pair, relying on expectations of a less hawkish Fed policy.
However, the unexpected dynamics of the dollar in the second half of Tuesday showed that the further collapse of the greenback in the short term seems to be canceled.
Sharp twist on the USD/JPY chart
The 5-day rally of the yen was interrupted by yesterday's comments by officials of the US central bank. The Fed speakers questioned the so-called dovish bias in the future course of the central bank.
Thus, the president of the Federal Reserve Bank of San Francisco, Mary Daly, said that the work to combat inflation in the United States has not yet been completed.
The official also noted that now there is nothing to indicate a halt in price growth in the near future. Based on this, she suggested that the Fed still has a long way to go before starting to slow down the pace of tightening.
Her colleague, the president of the Federal Reserve Bank of Chicago, Charles Evans, spoke in the same tone. He did not discount the possible increase in rates by 75 bps in September, if inflationary pressure does not begin to weaken by then.
As we can see, there is still a spirit of solidarity in the ranks of the Fed regarding hawkish tactics. This increases the likelihood that at its next meetings, the central bank may continue to fight inflation by sharply raising rates.
The latest statements by representatives of the Fed turned out to be a complete surprise for the market. This explains the sharp change in the direction of the dollar.
By the end of Tuesday, the US currency index jumped by 0.9% to 106.31. At the same time, the dollar-yen pair showed the greatest dynamics.
The greenback rose by 1.2% to the level of 133.12 against the yen. In addition to the macroeconomic factor, yesterday the USD was supported by geopolitics.
Consumer interest in the dollar has intensified amid growing tensions between China and America. The conflict was exacerbated by the trip of the Speaker of the US House of Representatives Nancy Pelosi to Taiwan.
The flight of investors from risky assets to safe havens strengthened the dollar, which became a tailwind for the USD/JPY pair.
What awaits the dollar-yen pair?
The hawkish rhetoric of the Fed members indicates that the dominance of the dollar is likely to continue in the next few weeks.
The growing risk that the difference in US and Japanese interest rates will become even greater may put strong pressure on the yen, especially ahead of the September meeting of the US central bank.
As for the short-term outlook of the USD/JPY pair, it will be determined by the next batch of statistical data. This week, pay attention to today's release of the July index of business activity in the US non-manufacturing sector from ISM, as well as Friday's release of the monthly report on employment in America for last month.
It is expected that the US business activity index will slow down in July to 53.5 against 55.3 in June, and the number of people employed in the non-agricultural sector of the country will decrease to 250,000 compared to the previous value of 372,000.
Negative data will indicate an economic downturn in America, which will once again increase fears about a recession.
If the risk of an economic slowdown increases, it will cause another wave of speculation that the Fed will still have to reduce the degree of its aggressiveness. In this case, the dollar again risks sinking against the yen.
