USD/JPY has declined to approximately 157.85 on Thursday. Japan’s 10-year JGB yield increased by 8 basis points to 3.055%, marking its highest level since August 1996. Fed’s Barr indicated that additional policy adjustments are probable to effectively manage inflation. The USD/JPY pair draws the attention of sellers, hovering around 157.85 during the Asian trading hours on Thursday. The Japanese Yen strengthens against the US Dollar as traders remain on high alert for further intervention from Japanese authorities. The statements from the Federal Reserve will be scrutinised closely later on Thursday. Japanese Finance Minister Satsuki Katayama stated on Thursday that the principles regarding foreign exchange, which were established following the coordinated Japan-US intervention, continue to be in effect. Meanwhile, Japan’s 10-year government bond yield climbed by 8 basis points to 3.055%, marking a 30-year high early on the day following a surge in US Treasury yields overnight. Last week, the Bank of Japan increased its policy rate by 25 basis points to 1.25%, marking the highest level since 1995. The vote concluded with a 7-2 outcome, with board members Toichiro Asada and Ayano Sato expressing dissenting opinions.
Markets interpret the dissent from two policymakers as an indication that further rate hikes could face increased challenges in implementation. This, in turn, may limit the potential appreciation of the JPY. Markets are currently estimating a roughly 30% probability that the Japanese central bank will raise its benchmark short-term interest rate to 1.50% in October, as reported. Hawkish remarks from Federal Reserve officials may bolster the Greenback. Fed Governor Michael Barr stated on Wednesday that the US central bank made a significant move last week to “recalibrate” short-term borrowing costs in order to reduce inflation and will probably need to implement additional interest rate increases. Analysts highlight that the evolving geopolitical backdrop is increasingly intertwined with financial market dynamics. They note that “Trump and Japan’s PM Takaichi met to reaffirm their close geopolitical and geoeconomic alliance,” and stress that “that now encompasses the BoJ and the Yen carry trade too.” In this context, Rabobank points out that “Japan’s big banks’ domestic loan share is seeing its first sustained post-1991 bubble burst rise,” describing this as “exactly what the White House and Takaichi want as (defence) industry investment rises.”
Fed’s Barr conveys a notably hawkish stance, as evidenced by the FXS Speechtracker score of 8/10, surpassing the historical average of 7/10 and indicating a more pronounced tightening bias than usual. The assertion that “further rate hikes [are] likely needed to ensure timely return to 2% inflation,” alongside comments that inflation risks have increased while labour market risks have receded, underscores a clear prioritisation of price stability over employment concerns. By acknowledging that the Fed was “out of position” and required a recalibration of policy, Barr strengthens the narrative that policy rates might need to increase or remain restrictive for an extended period. This environment is generally favourable for the Dollar and detrimental to risk-sensitive assets. The FXS Fed Sentiment Index increased by 0.42 points to 148.81, remaining solidly in hawkish territory and significantly above the neutral 100 threshold. This development reinforces the notion that this speech shifts the overarching Fed narrative further toward tightening. The combination of an elevated FXS Fed Sentiment Index and an above-baseline FXS Speechtracker score indicates that markets ought to factor in a greater likelihood of further rate hikes, which could have consequences for Dollar strength and ongoing challenges for duration and high-beta FX.
In the daily chart, USD/JPY exhibits a slightly bearish sentiment as it trades between the 20-period Bollinger middle band and the resistance posed by the 100-day moving average. The pair maintains its position above the lower volatility threshold; however, with prices constrained below the upper Bollinger band, the overall configuration suggests a market characterised by a predominance of rallies. A Relative Strength Index (14) reading around 54 indicates that momentum remains largely neutral to slightly positive. This suggests that, although downside pressure is currently contained, buyers may face challenges in decisively overcoming the cluster of resistance above. On the topside, initial resistance is positioned at the 100-day moving average at 159.55, followed by the upper Bollinger band at 160.75, where any test is likely to draw profit-taking and new supply. On the downside, the initial layer of support appears at the Bollinger middle band at 156.50, followed by a more robust structural floor at the lower band around 152.30; a daily close beneath this latter level would considerably intensify the bearish sentiment and pave the way for lower medium-term levels.
