USD/JPY breaks above 135

The Japanese yen is down sharply on Friday. In the European session, USD/JPY is trading at 134.93, up 0.73%. The yen fell below 135 earlier today for the first time since December 23.

Solid US data sends dollar higher

The US dollar is broadly higher and has pummelled the yen, climbing 2.6% this week. Strong US numbers have boosted the dollar, as the Fed is likely to remain hawkish with the economy remaining strong. Retail sales impressed with a 3% gain earlier this week, and PPI and unemployment claims were both better than expected. Consumer inflation ticked lower but was stronger than expected. Is the disinflation process stalled?

The economy has proven to be surprisingly resilient to rising interest rates, leading to hopes for a soft landing or even a ‘no landing’. The Fed has been consistent in its message of ‘higher for longer’ with regard to rates, but the markets haven’t really been listening, assuming that the Fed would have to pivot and even cut rates later in the year. The stronger-than-expected releases, from nonfarm payrolls to inflation to retail sales have forced the markets to revise their stance and move closer to the Fed position that the terminal rate will be above 5%.

Fed speak remains hawkish

Fed member Mester said she saw a strong case for raising rates by 50 basis points at the last Fed meeting, a sign that the Fed could move away from the moderate 25-bp hikes if inflation isn’t falling quickly enough. Mester said that she didn’t see inflation falling to 2% until 2025, which points to a long disinflation process.

The depreciation of the yen will be raising eyebrows in Tokyo. The Bank of Japan and the Ministry of Finance have often voiced unease when the yen has plunged and this has led to currency interventions in order to prop up the yen. It’s a delicate time for the Bank of Japan, as Kozo Ueda is set to take over as Governor in April. If the yen continues to lose ground, we’re sure to hear warnings from the BoJ and the Ministry of Finance, possibly with threats of intervention.

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USD/JPY Technical

• USD/JPY is testing resistance at 134.47. Above, there is resistance at 136.05
• There is support at 1.3355 and 1.3296