USD/JPY renews five-year high around 118.00 on strength in US Treasury yields

  • USD/JPY is posting a six-day winning streak to refresh the highest levels since January 2017.
  • Five-year US Treasury yields refresh record high, 10-year coupon renews monthly high.
  • Market sentiment declines as Russia-Ukraine peace talks contrast with Moscow’s invasion and strong demand.
  • Further covid woes in China, all-time high US inflation expectations are also contributing to a bullish bias ahead of the key FOMC.

USD/JPY remains center stage around five-year highs, up 0.45% intraday near 117.77 heading into Monday’s European session. Earlier in Asia, the yen pair refreshed a multi-day high at 117.87 as US bond bears propel demand for the greenback ahead of this week’s main Federal Open Market Committee (FOMC).

Five-year US Treasury bond yields are back to a record high above 2.0% amid record inflation expectations. That said, the 10-year bond coupon is also renewing a one-month high of around 2.04% at the latest. It should be noted that inflation expectations in the United States, as measured by the 10-year breakeven inflation rate according to data from the Federal Reserve Bank of St. Louis (FRED), reached a record high of 2, 94% at the end of Friday’s North American session.

The US Dollar Index (DXY) is tracking firmer returns to the north while posting a three-day uptrend around 99.16.

In addition to hopes of a 0.50% rate hike from the Fed, as seen by the CME’s FedWatch tool, fears of renewed tension between Ukraine and Russia are also supporting value demand. safe haven for the US dollar. Although weekend headlines suggest ‘brighter’ progress in peace talks, the Russian military’s latest bombardment inside Ukraine joins high demands from the two rivals to dim prospects for peace.

Elsewhere, China is reporting the highest daily infections since May 2020 and has announced a lockdown for the city of Shenzhen. New fears of the coronavirus in China renew the early woes of the pandemic and dampen the initial risky mood in Asia.

Amid these plays, Japanese Prime Minister Fumio Kishida criticized Russia’s invasion and pushed for a new international order while denying the need for nuclear talks with the United States.

That said, USD/JPY is likely to see further upside amid hopes of a Fed rate hike, as well as geopolitical and covid woes. Although the yen is also considered a safe haven, the price could therefore fall if US Treasury yields retreat from their multi-day high.

Technical analysis

An ascending trend line from late November 2021 around 117.90 at press time limits the immediate upside for USD/JPY ahead of the 2017 year high around 118.65.

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