USDJPY Hits 24-Year High On Record U.S. Inflation

15 Jun 2022

In 1H2022, macroeconomic and geopolitical developments such as the Russia-Ukraine war, China’s zero-Covid policy, global inflation and monetary policy tightening by major central banks have soured market sentiment and led to unprecedented volatility in the Forex market.

As a result of the risk-off sentiments, the US Dollar (USD) enjoyed tailwinds with its safe haven status propelling it to a 20-year high, as gauged by the US Dollar Index (DXY). For example, many countries have imposed sanctions on Russia’s exports since the start of the war, worsening the already disrupted global supply chain. The overall uncertain impact on the global economy caused by numerous sanctions on Russia’s exports, which worsened the already disrupted global supply chain, sparked safe haven flows into USD-denominated assets, thus boosting the value of the Dollar.

U.S. reports record inflation in May

After two years of keeping interest rates near zero to stimulate the pandemic-hit economy, the US Federal Reserve finally started its monetary policy tightening in March and May 2022 with interest rate hikes of 25bps and 50bps respectively to tackle the highest inflation rates in four decades.

Following the release of U.S. Consumer Price Index (CPI) data for May that scored a 40-year high at 8.6%, markets are pricing in a more aggressive rate hikes by the Fed for the remaining policy meetings in 2022. CPI is a key indicator to measure inflation and changes in purchasing trends. As the Fed has a mandate of maintaining price stability and maximum employment, the CPI is an important economic data that would drive the monetary policy decisions by the Fed. Wide speculation for a 75bps rate hike in the June interest rate decision to tame the inflation has bolstered the US dollar.

USDJPY – victim of diverging monetary policies

Against the hawkish backdrop of major central banks, countries that still hold a dovish stance would be at a disadvantage. The Bank of Japan (BOJ)’s governor, for example, recently said that monetary tightening is not a “suitable” measure at all as Japan’s domestic economy is still recovering from the pandemic. The USDJPY logged a 24-year high on 14 June as diverging monetary policies widened the yield spread, favouring holders of the higher-yielding USD.

Technical Outlook on USDJPY

Bullish momentum on USDJPY remains strong as it breaks a series of historical highs. Technical indicators like the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) are also painting a bullish picture.

Looking ahead, the immediate resistance for USDJPY is 2002 high at 135.19. If price manages to breach and find support above this point, the next technical target would be set at 147.71 that is the 1998 high.

Wednesday, June 15

USD – Retail Sales (MoM)(May), Retail Sales Control Group (May)

Thusday, June 16

USD – Fed Interest Rate Decision, Fed’s Monetary Policy Statement, FOMC Economic Projections, FOMC Press Conference, Building Permits (MoM)(May), Housing Starts (MoM)(May), Initial Jobless Claims(Jun 10), Philadelphia Fed Manufacturing Survey(Jun)

JPY – Exports (YoY)(May), Imports (YoY)(May), Merchandise Trade Balance Total(May)

Friday, June 17

JPY – BoJ Interest Rate Decision, BoJ Monetary Policy Statement, BoJ Press Conference

USD – Fed’s Chair Powell speech

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