The USD/JPY pair has rallied to over 159, driven by a strengthening US Dollar and a weakening Japanese Yen. The US Dollar has gained due to rising US Treasury yields and hawkish comments from Federal Reserve officials. The Japanese Yen has weakened following a fall in Japanese inflation data for May, with core inflation decreasing and gains attributed to energy price increases. As a result, USD/JPY has reentered intervention territory, increasing the likelihood of authorities intervening to push the pair lower.
The recent rally in USD/JPY has been fueled by rising US Treasury yields, which are highly correlated to the US Dollar. The increase in bond yields has been attributed to hawkish comments from a Federal Reserve official, Tom Barkin, who suggested that Fed rate cuts would come in time but required clearer inflation signals first. Interest-rate markets are now pricing in two potential rate cuts later in the year, signaling a shift from previous expectations of a cut in September.
Japanese inflation data for May showed a fall in underlying inflation, despite a rise in the headline rate due to energy price increases. The cooling of underlying inflation suggests that the Bank of Japan will be less inclined to raise interest rates in order to reverse the long-term depreciation of the Yen. The Bank is likely to leave rates unchanged after an anticipated rate hike in July, as inflation is expected to slow more sharply than the Bank had anticipated.
With USD/JPY reentering the intervention zone, where Japanese authorities previously intervened to counteract the devaluation of the Yen, there is speculation that intervention could occur again. The increased frequency of warnings from currency officials about further weakness being countered by direct intervention suggests a potential pullback in the pair. The previous intervention in late April and early May resulted in a sharp correction for USD/JPY from 160 to 152.
In conclusion, the rally in USD/JPY to over 159 has been driven by a combination of a strengthening US Dollar and a weakening Japanese Yen. Rising US Treasury yields and hawkish Fed comments have supported the US Dollar, while cooling Japanese inflation data has weighed on the Yen. As the pair reenters intervention territory, there is an increased possibility of authorities intervening to push the pair lower. Overall, the future direction of USD/JPY will likely be influenced by further developments in US Treasury yields, Fed policy, and Japanese inflation data.
