August 26, 2022 03:00 AM ET
By: AnalysisWatch
Fresh buying on Friday is attracting fresh buying on Friday and the USD/JPY pair is climbing back up to the 137.00 mark in the early European session, reversing losses from the previous day.
The U.S. dollar builds on the overnight rebound from its weekly low and gains some ground on the last day of the week, which in turn provides some support for USD/JPY. The dollar continues to be supported by expectations that the Fed will tighten policy further in order to keep inflation in check. These bets were reaffirmed by upbeat U.S. macroeconomic data and optimistic remarks from Fed officials on Thursday.
Indeed, St. Louis Fed Chief James Bullard emphasized the need to continue raising interest rates.
Furthermore, Kansas City Fed President Esther George stated that the Fed has not yet raised rates to levels that are weighing on the economy and that rates may need to be raised above 4% for some time. However, policymakers reserved judgment on the extent of the rate hike until the next FOMC policy meeting in September.
Nevertheless, markets are still pricing in a higher probability of a 75 basis-point rate hike. In contrast, the Bank of Japan is expected to keep its policy ultra-loose, marking a major divergence from a more hawkish Fed. This, combined with a generally positive tone in equity markets, is weakening the safe haven Japanese yen and contributing to the rise in the USD/JPY pair.
The fundamental backdrop supports the outlook for further appreciation in the near term. That said, bulls may refrain from placing aggressive bets and prefer to wait for a more hawkish message from Fed Chairman Jerome Powell at the Jackson Hole Symposium. While waiting for the outcome of the key event, traders could be inspired by the release of the U.S. PCE data, scheduled later in the North American session.
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