USD/JPY plays around two-decade high at 145.90, dismal market mood favors upside

• The current USD/JPY price has poked the BOJ’s intervention area around 145.90 to support Japanese yen.
• Market sentiment has turned extremely negative as Russia-Ukraine tensions have aired nuclear attacks.
• A divergence in the headline and core US CPI banks upon weaker gasoline prices.

The USD/JPY pair is hovering at a make or break figure of around 145.90 as the impact of the intervention by the Bank of Japan (BOJ) in the currency markets to safeguard yen against sheer volatility has eased dramatically.

Market sentiment is extremely negative amid escalating Russia-Ukraine tensions as it has triggered the risk of extension in supply chain bottlenecks in Eurozone. Also, the support of advanced air systems pledged by US President Joe Biden to Ukraine has triggered the risk of nuclear attacks.

Apart from the negative market sentiment, a prolonged ultra-loose monetary policy by the Bank of Japan (BOJ) is also responsible for the poor performance of the Japanese yen. On September 22, the BOJ intervened in the currency markets to support yen citing that current levels don’t justify Japan’s economic fundamentals.

In the Tokyo session, Japan’s top currency diplomat Masato Kanda said that “we are always ready to take necessary steps against excess FX volatility.” He further added that the decision on fx intervention can be taken anywhere, even from an airplane.

Meanwhile, the US dollar index (DXY) is playing around the weekly highs of 113.50 and is preparing for an upside break ahead of the US Consumer Price Index (CPI) data.  According to the preliminary estimates, a divergence is expected in the headline CPI and core CPI figures. The headline CPI will decline to 8.1% while the core CPI that excludes oil and food prices will improve to 6.5%. The divergence in expectations for dual inflation catalysts banks upon weaker gasoline prices.