USD/JPY surpasses 114.00 by Treasury yields

The U. S. dollar regained bullish traction on Friday and is rallying nearly 0.5%, erasing the previous two days’ losses.

The USD/JPY is testing levels above 114.00 at the time of writing, after having bounced up from two-week lows at 113.25 on Thursday. Higher inflation expectations and stronger yields are buoying the USD

The American currency has been boosted by higher inflation expectations in the U. S., which have reinforced the idea that the Federal Reserve will be forced to accelerate its monetary policy normalization plan.

The U. S. core personal consumption expenditures, the Fed’s preferred indicator for consumer inflation, has risen 3,6% year-on-year in September, which adds pressure on the bank to start increasing interest rates. As a consequence, U. S. bond yields ticked up on the back of these figures, pushing the U. S. dollar higher across the board.

Currency volatility surged in the second half of the week, after a very calm opening. Monetary policy decisions by the ECB, the BoC, and the BoJ plus the U. S. GDP data have triggered significant fluctuations.

In spite of the current bullish reaction, this may be a warning to the market that in view of the inflationary implications the BoJ is not entirely happy with the JPY’s position at the worst performing G10 currency in the year to date.

This signal may be enough to limit upside potential for USD/JPY, particularly since the weakness of U. S. Q3 GDP data has also undermined the greenback today. We retain a 3 month USD/JPY forecast of 112.