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USD/JPY on track for new highs

The USD/JPY pair continues to test new highs. Yesterday, the pair soared to a 7-month high of 141.82 on the dovish statements made by Japanese officials before reversing to the downside following the speech of the Federal Reserve Chairman in the US Congress. So, what did Jerome Powell say and why are most experts still bullish on the USD/JPY pair?

BOJ and Fed on opposite sides

First, let us explain what triggered the recent leap of the dollar against the yen. The key triggers were the minutes of the Bank of Japan's April meeting published on Wednesday morning, followed by dovish comments from BOJ officials.

The BOJ minutes showed that the decision to keep super-low rates in April was unanimous. All 9 board members supported the need to continue the ultra-loose policy to achieve stable economic growth in the country.

The Bank of Japan made a similar decision this month. In addition to this, BOJ Governor Kazuo Ueda reiterated yesterday that the central bank intends to maintain its monetary policy in its current form in the near future, despite the fact that the Japanese economy is moderately picking up pace.

BOJ board member Seiji Adachi expressed the same view on Wednesday. He admitted that inflation in the country is rising faster than he expected, but this is not an argument for an emergency change in the monetary policy.

Mr. Adachi advocated for the preservation of an ultra-soft monetary policy due to uncertainty regarding the consumer price growth forecast and also dismissed expectations of an imminent change in the yield curve control mechanism.

"If the bond market remains in its current state, the likelihood of a YCC adjustment in July is small," he said.

The dovish rhetoric of BOJ members put strong pressure on the yen across the board, including against the US dollar, which was expecting hawkish support from the Federal Reserve Chairman on Wednesday.

However, Jerome Powell did not live up to the hopes of dollar bulls, which negatively affected the dynamics of the greenback. After the speech of the Fed Chairman before Congress, USD/JPY retreated from its intraday high by 0.6%, to 141.6.

Meanwhile, yesterday's speech by Powell cannot be called dovish at all. The official said that the regulator will have to go a long way to return inflation to the target of 2%, and called the last dot plot "a pretty good guess" about where the Federal Reserve is heading.

The dot plot published last week showed that FOMC members expect another 2 rate hikes this year to a peak of 5.6%.

Jerome Powell's latest comments show that he does not rule out such a possibility, which should have supported the dollar. But at this stage, when the regulator has already shown softness by taking a break in June, traders obviously wanted to hear a more confident tone from the Fed Chairman.

Right now, most market participants expect only one additional round of tightening in the US. If Jerome Powell had hinted at more rate hikes, it would have instantly driven up the dollar across the board.

The yen will remain under the dovish pressure of the Bank of Japan in the foreseeable future, so it doesn't matter how many more rate hikes are planned in the US. Any prospect of continuing aggressive policy in the US will contribute to the weakening of the Japanese currency against the dollar.

Analysts believe that the USD/JPY pair can continue its rally in the near future even if today's rhetoric of the Fed chairman is again cautious.

Markets may be unhappy with what Powell is saying but the US central bank is not going to wind down its anti-inflation campaign this year, and even less so to lower rates, as was previously assumed.

Maintaining a hawkish stance in the US should support the USD/JPY asset. Considering Japan's commitment to a dovish policy, the pair has no other way but to move upwards.

Technical outlook for USD/JPY

Economists at Credit Suisse believe that the area of 142.25/50 will be a fairly strong barrier for buyers. However, their overall forecast for the USD/JPY pair remains firmly bullish.

"We expect that an eventual breakthrough above this level will occur. This will give the pair new upward momentum and open the way to the next significant resistance around 145.00/12," the experts noted.

A pullback below 139.85, on the other hand, will result in a downward consolidation. The next noticeable support will be the June low of 138.48, followed by the 200-day moving average at 137.78/23.