Yesterday, the yen/dollar pair retested a 6-week high of 139.01. The last time the pair was seen trading this high was in mid-July when the price hit a 24-year high of 139.40. So, the pair bulls are storming the area of 139 after taking a 1.5-month break.
The US dollar has considerably strengthened after Jerome Powell's speech last Friday. His message was clearly hawkish as he confirmed that the Fed was determined to raise rates further. Rates will stay high even though they may hurt households and businesses, Powell said. The chief of the US central bank warned that the country would have to face slower economic growth and a weaker labor market. Powell explained that this was the price they had to pay for curbing inflation.
Such blunt rhetoric of the Fed chairman supported the greenback. The likelihood of a 75-basis-point rate increase in September went up to 70% which opened the way for USD bulls. The US dollar index hit a 20-year high yesterday, having reached the mark of 109.47. This is the highest value recorded since September 16, 2002.
News from China added fuel to the fire. It was reported that corporate earnings decreased in the first six months of the year. Thus, earnings in the manufacturing sector dropped by almost 13%. The income of electricity companies declined by 12%. Beijing is said to cut industrial production to reduce carbon emissions. Against this backdrop, the Shanghai Composite Index lost nearly 0.5%. At the same time, the US dollar gained support as a safe-haven asset.
Today, the yen/dollar pair is going through a corrective pullback after its recent rally. The price has closely approached this year's high at 139.40. Notably, the pair was traded above this mark 24 years ago in 1998. So, the area of 139 is a challenging obstacle for bulls. They made several attempts in July to settle above this range but all was in vain. The same happened in August.
However, the existing fundamental background contributes to the uptrend in the yen/dollar pair. Last Friday, the Fed chairman boosted the confidence of the dollar bulls who were slightly worried due to recent inflation reports. The latter showed first signs of a slowdown in CPI and PCE. Moreover, Powell made it clear that the central bank was ready to fight inflation until "the job is done." There were speculations that the Fed would start to gradually lower the rate in the second half of 2023. Yet, some Fed officials denied these comments saying that the regulator has not yet reached its prior goal of curbing explosive inflation growth. When first signs of a slowdown appeared in July and August, speculations of a dovish turn in monetary policy started to weigh on the greenback.
In fact, Jerome Powell has denied this information. He confirmed that the Fed's main goal was to stabilize prices even if it takes a long time. In other words, the US currency will get a strong long-term backup from the Fed.
Apparently, the yen is not able to withstand the pressure from dollar bulls. The Bank of Japan maintains a dovish stance on its monetary policy despite rising inflation. At its last meeting, the Japanese regulator kept its monetary policy unchanged. Only one member of the board voted against this. The BoJ left the rate at the same level and decided to maintain its yield curve control at 0.25%. Haruhiko Kuroda reiterated that the central bank "won't hesitate to take additional monetary easing steps as necessary" given the impact that the pandemic has had on the economy.
Today's pullback can be explained by an overall weakness of the US dollar. USDX retreated from 20-year highs amid a drop in the 10-year Treasury yields. This is a good opportunity to use downside pullbacks for opening long positions. The nearest upside target in this case is the level of 139.40. This yearly high coincides with the upper band of the Bollinger Bands indicator on the daily chart.
All in all, both fundamental and technical factors support the uptrend. On all higher time frames (starting from H4), the pair is holding at the upper line or between the medium and upper lines of the Bollinger Bands indicator. Besides, the Ichimoku Indicator formed one of its strongest bullish signals called Line Parade on the daily and weekly charts. Therefore, any corrective pullbacks should be used for going long with the target found at 139.40.