Jerome Powell has been nominated for another term as head of the Federal Reserve (Fed). As a result, markets believe more strongly in a potentially faster US interest rate hike. This is benefiting the US dollar, which is at its most expensive against the yen since 2017.

Traders are fully pricing in a rate hike by the Fed in June 2022.
BoJ’s loose monetary policy adds to pressure on JPY

Fed and BoJ policy divergence supports USD/JPY quotes

During Monday’s session, the exchange rate of the currency pair USD/JPY rose by 0.78 percent bouncing off the dynamic support in the form of the 20-day moving average. Today, however, the bulls established another peak by testing the round level of 115.00.
– ‘We continue to believe that the dollar-yen exchange rate needs to rise further and forecast that it will reach 120.50 by December 2022. Interest rate differentials between the US and Japan will also increasingly support the pair as the Fed begins its tightening cycle next year,’ said Kim Mundy, strategist at Commonwealth Bank of Australia.

Markets are counting on the U.S. to accelerate monetary policy normalisation as the economy emerges from a pandemic and inflation picks up. That provides support to the dollar, which is one of the strongest G10 currencies.

Traders are fully pricing in a 25 basis point rate hike at the June 2022 FOMC meeting. Now additional ones see a chance of further hikes in September and December next year.

The yen, on the other hand, is the worst performing of the G10 group. Strong pressure on the JPY is evident, supported by the BoJ’s loose monetary policy to stimulate economic growth.

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