USD/JPY reaches a 20-year high and breaks 127.00 on high US yields

• The USD/JPY begins the week in a positive tone, up some 1.67%.
• Geopolitical issues and surging energy prices weighed on the JPY.
• St. Louis Fed President James Bullard said inflation is “far too high.”
• USD/JPY Price Forecast: The speed of the rise keeps the USD/JPY subject to a mean reversion move.

USD/JPY prolonged its gains to four consecutive trading days and printed a 20-year high above the 127.00 mark, amidst the escalation of the Ukraine-Russia war and the lack of cease talks, which paints a picture of no truce in the near-term. At the time of writing, the USD/JPY is trading at 127.07, reaching a 20-year high.

Ukraine-Russia jitters and high energy prices weigh on the Japanese yen

The headlines remain dominated by the Ukraine-Russia conflict. Deterioration in Eastern Europe elevates the prospects of high global inflation, as reflected by oil prices, as WTI’s rose 0.60%, above the $107.20. Analysts at banks note that increasing oil and natural gas prices hurt Japan’s reliance on foreign energy. The mix of soaring energy prices and a weaker Yen triggered reactions of the Japanese Finance Minister and the Bank of Japan (BoJ). On Monday, BoJ Governor Kuroda said he was keeping an eye on the impact of excessive FX movements on the economy and added that the JPY weakening has been quite sharp.

In the meantime, the US Dollar Index, a gauge of the greenback’s value against a basket of its rivals, is up 0.31%, sitting at 100.80, supported by expectations that the Federal Reserve would hike 50 bps at the May meeting.

In the meantime, Fed speaking continued ahead of April 23, when the Fed will enter its blackout period for the May 4-5 meeting. On Monday, St. Louis Fed President James Bullard said that inflation is “far too high” while repeating its case of hiking rates to 3.5% by the end 0f 2022. Bullard added that the Unemployment Rate can continue to fall even with aggressive rate hikes, repeating his view that now at 3.6%, unemployment will go below 3% this year.

Last week, the New York Fed President John C. Williams (voter, neutral) stated that a 50 bps rate increase is a reasonable option, but the rate hikes will depend on the economy’s path. Williams added that the Fed needs to move “expeditiously” to normal policy levels and a more neutral.

• Also read: Fed’s Bullard: Inflation expectations could get out of control if we don’t act quickly

USD/JPY Price Forecast: Technical outlook

The speed of the rise of the USD/JPY from 114.00 to 126.99 would keep the pair susceptible to a mean reversion move. However, the US 10-year Treasury yield surge maintains the USD/JPY under buying pressure. The Relative Strength Index (RSI) at 83.68 reflects the aforementioned, and a negative divergence between the price action and the RSI in the daily chart has formed. However, the slope of the RSI is nearly horizontal and appears to confirm a consolidation in the USD/JPY.

If the USD/JPY resumes upwards, the first resistance would be the 127.00 mark. A breach of the latter would expose the February 2002 cycle high at 135.02, but it would find some hurdles on the way north. The next resistance would be May 2002 highs at 129.09, followed by the 130.00 mark.

On the flip side, the USD/JPY first support would be the March 28 cycle high-turned-support at 125.85. Once cleared, the following line of defense would be March 24 daily high at 122.40 and then the March 31 cycle low at 121.27.