At the start of the week, the USD/JPY pair showed an impressive upward momentum, closely approaching its high from August 17 at 146.565. However, it failed to settle at this level. According to experts, the bullish potential of USD/JPY appears to be limited. Let's discuss what is affecting the quote and where its growth ceiling lies.
USD bulls getting ready for Jackson Hole
Yesterday, USD/JPY surged by 0.56% to 146.2 even though the market exhibited a rather cautious sentiment ahead of this week's key event - the Federal Reserve Symposium in Jackson Hole.
A sharp spike in US Treasuries yields provided support for the pair. Last Monday, the yield soared to its highest level since 2007, at 4.35%.
The increase in the yield of US government securities was influenced by speculations suggesting that the US interest rates might remain high for an extended period.
Presently, dollar bulls are hopeful that the Federal Reserve will continue its hawkish monetary policy for the coming months.
Such a strategy should ideally support the US dollar, which could initially react with a drop if there is any pause in US rate hikes. The majority of market participants believe that this figure has peaked and will not rise any further.
Many analysts posit that dollar buyers might receive validation of their theory about an extended period of high-interest rates this week.
Jerome Powell, the head of the US central bank, is expected to speak at the annual Federal Reserve Symposium in Jackson Hole on Friday. If Powell emphasizes the necessity of keeping the rates higher for longer, it would significantly boost the US currency.
Currency strategists predict even stronger dollar volatility if the Fed Chairman leaves the door open for another rate hike.
"In such a scenario, a new USD rally is likely to form. I wouldn't rule out that the US dollar index might break above 104 in the near term," stated Westpac analyst Richard Franulovich.
His colleagues at MUFG also see further growth potential for the US currency. However, experts from the Japanese bank are convinced that USD/JPY will significantly lag in its growth pace compared to other dollar majors.
"Given that the USD/JPY asset is currently in the intervention danger zone, we anticipate intensified threats from Tokyo in the foreseeable future. This will be the main obstacle for the quote on its upward path," noted the MUFG economists.
Where is the growth limit for USD/JPY?
Last year, the Japanese government intervened in the market twice with the intention to support its national currency when it sharply declined against the US dollar.
The first intervention was triggered when the yen depreciated to 145 per US dollar. This year, JPY has repeatedly crossed this mark, and the Japanese authorities have confined themselves to warnings about potential interventions.
This could indicate that the so-called "red line" has shifted to the 150 mark. Testing this level triggered the second intervention in 2022.
"We believe that the Japanese Ministry of Finance will not intervene in the currency market around the 145 mark. The new intervention threshold for purchasing yen is around 150," analysts from J.P. Morgan stated last Monday.
Additionally, experts pointed out that the need for intervention at this stage is not as pressing as it was in September and October of the previous year. This is because the fundamental conditions of the Japanese economy have significantly improved since Tokyo's last market intervention.
Currently, the 150 mark seems to be a sort of growth limit for the USD/JPY pair. However, many analysts are skeptical that the asset will approach this level anytime soon, even if Jerome Powell's tone at Jackson Hole is extremely hawkish.
In the foreseeable future, the price is likely to remain under the influence of speculations about upcoming monetary changes in Japan. These speculations intensified this morning against the backdrop of a rapid increase in the yields of 10-year and 30-year Japanese government bonds.
On Tuesday, both metrics surged to their highest levels since 2014, registering at 0.66% and 1.66% respectively. This was facilitated by a significant improvement in economic growth and inflation indicators in Japan.
Following recent optimistic data and the latest adjustments by the Japanese regulator to the yield curve control mechanism, traders have started to increase bets on the Bank of Japan (BOJ) potentially abandoning its ultra-soft monetary policy soon.
Further strengthening of hawkish market sentiments regarding the monetary policy of the Bank of Japan will also serve as a serious obstacle for the USD/JPY pair.
Analysts at UOB predict that, given such a fundamental backdrop, it is unlikely for the major to rise above 147.50 in the coming weeks.