- A combination of supporting factors pushed USD/JPY to over a one-week high on Tuesday.
- A fresh leg up in the US bond yields boosted the USD and provided a goodish lift to the pair.
- Widening of the US-Japan yield spread, a positive risk tone undermined the safe-haven JPY.
The USD/JPY pair trimmed a part of its intraday gains and was last seen trading around the 115.30 region, still up over 0.15% for the day.
Following the overnight downtick, the USD/JPY pair caught fresh bids and shot to over a one-week high during the early part of the trading on Tuesday. This marked the third day of a positive move in the previous four and was sponsored by a combination of factors – a goodish pickup in the US dollar demand and a fresh leg up in the US Treasury bond yields.
Investors now seem convinced that the Fed will tighten its monetary policy at a faster pace and have been pricing in the possibility of a 50 bps rate hike in March. The market bets were reaffirmed by Friday's mostly upbeat US monthly employment details, which pointed to the underlying strength in the labour market that should support the economic growth.
This was reinforced by the fact that the yield on the 2-year and 5-year US government bonds – which are sensitive to rate hike expectations – shot to the highest level since February 2020 and July 2019, respectively. Adding to this, the benchmark 10-year bond yield jumped closer to the 2.0% threshold, widening the US-Japanese government bond yield spread.
The Bank of Japan is expected to step in to defend its 0% target for the 10-year JGB, which remains within the implicit 50 bps band set as part of an ultra-easy monetary policy. This, along with a positive tone around the equity markets, undermined the safe-haven Japanese yen and should continue to act as a tailwind for the USD/JPY pair, at least for now.
The fundamental backdrop seems tilted firmly in favour of bullish traders and supports prospects for a further near-term appreciating move for the USD/JPY pair. That said, traders seemed reluctant to place aggressive bets ahead of Thursday's release of the US inflation figures. This, in turn, seemed to be the only factor that capped the upside for the major.
There isn't any major market-moving economic data due for release from the US on Tuesday, leaving the USD at the mercy of the USD price dynamics. Apart from this, traders will take cues from the broader market risk sentiment to grab some short-term opportunities around the USD/JPY pair.