USD/JPY Catapulted to New 24 Year Highs

USD/JPY Analysis

The pair gains more than 2.5% from Monday and runs its fourth straight profitable week, breaking fresh ground today, as it is catapulted to the highest level since August 1998. The stark policy differential from the US and Japanese central banks is the main driver, since the latter is on the far dovish side of the policy spectrum, contrary to its major counterparts.

The US Fed has already hiked rates four times this year ( to 2.25-2.5%) and despite hints of a slower pace ahead, it has recently reiterated its resolve to bring inflation down, with Chair Powell keeping the door open to another outsized 0.75%, in his recent Jackson Hole speech.

Markets definitely expect such a move, as CME's FedWatch Tool assigns more than 70% probability to this outcome on the September 21 meeting, with rates seen at 4% by the end of the year ^[1]. This provides a source of strength to the greenback, also helped by yesterday's strong services PMIs.

Japanese government officials made some verbal interventions since yesterday in support of the Yen, with Chief Cabinet Secretary Hirokazu Matsuno expressing his concern about "rapid, one-sided moves in the currency market recently", according to Reuters. ^[1]

However markets brushed aside this commentary and USD/JPY extends gains to new 24+ year highs today, probing 144.00. This bring 147.90 in the spotlight, although it may be early for moves past this level.

Despite the clear and sustained bullishness, the overbought conditions revealed by the Relative Strength Index could lead to a deflation below 142.49, but a correction that would breach 139.39-138.83 seems hard at this stage.

Markets will be on the lookout for any more intervention (verbal or actual), as they wait for tomorrow's growth figures form Japan and Thursday's speech by Fed Chair Powell, right before the communication blackout period kicks in.