USD/JPY Rebounds On Hawkish Fed Speakers, Higher US Yields

The USD/JPY pair has rebounded from the 1.1500 level during the US trading session on Monday, having failed on multiple occasions since last Friday to break below the key level. The pair is now trading close to highs of the day in the 115.60s, up about 0.2% and is eyeing a retest of the 116.00 level and last week’s highs in the 116.30s.

Though geopolitical tensions remain elevated coinciding with what seems like the final diplomatic push to avoid a Russia-Ukraine military conflict, the yen’s safe-haven bid has been easing as the US dollar becomes the haven of choice.

That is likely due to a surge in US government bond yields on Monday (the 2-year +9bps and back above 1.60% and the 10-year +6bps and back above 2.0%) as markets amp up Fed tightening bets once more.

Spurring the move were comments from FOMC member James Bullard who doubled down on his calls for the Fed to hike interest rates by 100bps by July 1 and pledged to try to bring round other Fed colleagues to his view.

USD/JPY remains highly sensitive to US /Japan bond yield differentials, particularly at the long end. With the BoJ having pledged to buy JGBs in unlimited size to prevent the Japan 10-year yields from rallying above 0.25% (and having succeeded thus far), the further 10-year US yields rise, the more upward pressure will be exerted on USD/JPY.

Data and Fed speak this week will be viewed in the context of how it influences the chances of a 50bps rate hike from the Fed in March and the pace of subsequent tightening. It’s a busy week on the economic calendar, with January Producer Price Inflation and Retail Sales data, as well as February regional Fed manufacturing surveys out.