Towards the end of last week, the US dollar got another dose of hawkish fuel. The greenback accelerated in all directions, but it showed the best dynamics against the yen. Will the USD/JPY pair be able to build a rally?
What kind of fly has bitten the dollar?
The dollar is preparing to end February with a gain of over 3%, thus, break a rather long losing streak. Recall that the DXY has been unable to show positive movements for 4 months straight.
However, in February, the greenback finally managed to return to the green zone. The market's hawkish expectations regarding the Federal Reserve's future policy helped it rise.
Stronger U.S. inflation combined with strong U.S. economic data has convinced investors that the central bank does not intend to end monetary tightening and the dovish track yet.
Traders now expect the Fed to continue raising rates until they peak at 5.4% in July and keep them high for the rest of the year.
Also, this month, there has been renewed talk of more aggressive action from the central bank at the upcoming FOMC meeting in March.
There is an opinion that the Fed's next move could be a rate hike by half a percentage point instead of 25 bps, as it did in February.
Speculation on this topic intensified noticeably last Friday after the release of the U.S. Personal Consumption Expenditures Index.
The Fed's go-to inflation gauge, the Core PCE index, showed prices rising 0.6% on a monthly basis in January and is up 5.4% from a year earlier. This is higher than economists' preliminary estimates.
The data indicated that inflation in America is not declining as fast as forecasted and confirmed market expectations for further tightening of the Fed's monetary policy.
Against that backdrop, the DXY index rose 0.6% toward the end of the week, allowing it to cross the 105 threshold for the first time since early January. The intraday peak for the dollar was the highest in seven weeks at 105.32.
The U.S. currency's growth was supported by another surge in 10-year U.S. Treasury bond yields. The index surged to 3.95% on stronger hawkish market sentiment, putting serious pressure on the yen.
The yen, which is highly sensitive to changes in U.S. bond yields, fell 1.3% against the dollar on Friday. Thus, the pair tested a 2-month high at 136.5.
Ueda betrayed the yen?
An additional blow to the Japanese currency at the end of last week was the ambiguous speech of Kazuo Ueda, a candidate for the position of the Bank of Japan head.
The 71-year-old economist should replace current BOJ Governor Haruhiko Kuroda whose term ends in April.
Many investors are now expecting that Ueda will begin a new monetary era, which involves abandoning the policy of controlling the yield curve and raising interest rates.
During his first public speech, which was held in the Japanese parliament on February 24, Ueda indeed hinted at a possible pivot of the monetary course, but there were too many "buts" in his statements.
The candidate said that the further route of the central bank will depend on the economic situation in the country and inflation data. If the BOJ's 2% price target is met, the central bank may begin to normalize policy, Ueda said.
It would seem that this is the long-awaited hawkish signal! But the official's position is painfully familiar: how many times have we heard similar speeches from Kuroda, but the BOJ is still there.
Most analysts believe Ueda will not rock the boat once he is at the helm. Most likely, he will calmly sail along the course bequeathed by his predecessor.
"Ueda largely trod a path familiar to Federal Reserve chairs Ben Bernanke, Janet Yellen and Jerome Powell at similar points in their careers: Emphasize continuity and gradualism. This much is clear, though: He is unlikely to tighten policy in any meaningful way anytime soon. While 10 years ago at his own hearing, Kuroda blasted the BOJ policy of the time as insufficient to cure deflation, Ueda signaled, as forcefully as he could, that for now he's going to stay the course," Bloomberg analyst Daniel Moss shared his views.
This morning, in his speech before deputies of the upper house of the Japanese parliament, Ueda repeated the same talking points that he made last week. In fact, the market didn't hear anything new, which could stir up demand for the yen. That is why most experts forecast a continuation of the rally in USD/JPY in the short term.
"The current fundamental picture looks more favorable for the growth of the dollar than for the yen," Goldman Sachs said. The real increase of rates in America obviously outweighs speculations about a possible BOJ pivot. Therefore, we believe that in the near future, the JPY will continue to be under pressure from the U.S. bond market and will show moderate weakness.
Technical picture of the USD/JPY pair
At the start of the European session on Monday, the USD/JPY asset demonstrated a breakout of the "inverted head and shoulder" pattern on the 4-hour chart, which indicates a bullish reversal after a long consolidation.
There was an upward momentum after a solid move above the area of horizontal resistance built from the December 28 high at 134.50.
In addition, dollar bulls are gaining strength thanks to the 50-period exponential moving average near 134.60.
Also, the continuation of the uptrend is now indicated by the Relative Strength Index (RSI), which is fluctuating in a bullish range of 60.00-80.00.
If the asset rises above the intraday high of 136.56, the bulls will switch their attention to the high of 137.48 on December 12, and then try to break through the horizontal resistance, located from the high of December 15 at 138.18.
The USD/JPY bears may take advantage if they can push the price below the low of 133.60 on February 16. In that case, the inverted H&S formation will be nullified, and that will push the asset first to the round figure of 133.00, and then deeper to the downside at 131.65.
