Over the past week, USDJPY has continued its march near multi-year highs, exploring the area between 162 and 163. This reflects relentless demand for the dollar, despite the increasing probability of currency interventions by Japan’s Ministry of Finance—a risk that markets have already priced in, as the yen approached a dangerous zone.
So, the pair’s key pillar of support is now a stronger greenback. What lies behind this? The Federal Reserve’s (Fed) hawkish stance reinforces investors’ expectations that interest rates will stay higher for longer—a clearly positive factor for the American currency. Elevated Treasury yields make dollar-denominated assets way more appealing. Another important factor to consider is the upcoming labor market report. If the employment readings come in above projections, USDJPY could skyrocket to new peaks on rising expectations of tighter monetary policy.
Meanwhile, the Bank of Japan (BoJ) is also trying to strike a hawkish tone. The regulator has recently raised borrowing costs to 1%—the highest level in decades. Sadly, this appears to be insufficient to underpin the yen. According to investors, the Asian central bank keeps moving far too slowly, given the country’s inflation figures. Besides, the policy gap between the Fed and the BoJ remains significant. As a result, carry traders continue to work against the Japanese currency.
The key obstacle to the pair’s rally could be government interventions. The closer USDJPY gets to the 165.00 level, the higher the risk is. That said, the fundamental environment remains bullish. The dollar’s yield advantage and the BoJ’s cautious stance both support the pair’s further upside.
The final recommendation:
— Buy USDJPY at the current price, targeting 164.00 within a month.
— Place Stop Loss at 160.50, just below support, to manage risks if the market plays against us.
