USD/JPY dips further to hit session lows near 113.50

• The dollar remains bid and reaches one-week lows near 113.50.
• Profit-taking hurts the USD as Fed tightening expectations wane.
• USD/JPY ready to extend gains beyond 115.00.

The US dollar is heading lower on Friday, extending its reversal from multi-year highs at 114.70 to session lows right above 113.55. The greenback is on track to post its first negative weekly performance since late August.

The US dollar dips as Fed tightening expectations wane

Investors’ expectations that the Federal Reserve would lead the world’s major central banks on the monetary policy normalization path, which had been boosting the US dollar over the last two months, have faded into the background, denting demand for the USD.

The market has been repricing monetary tightening expectations, as other central banks, like the BoE or the BoC, have started to anticipate the possibility of hiking rates to tackle inflation pressures.

Furthermore, profit-taking might also be responsible, at least in part, for the current dollar weakness. With the USD Index reaching one-year highs against its main rivals last week, some investors might have closed long positions.

The broader picture, however, remains fairly supportive of the greenback, with the yen hampered by an adverse monetary policy differential. The Federal Reserve is about to start rolling back its monetary stimulus program and will probably start hinting towards interest rate hikes in mid-2022. With the BoJ still immerse in an ultra-expansive policy and maintaining a yield control curve, the widening gap between the US and Japanese yields will remain clearly favorable for the USD.

USD/JPY: Seen appreciating beyond 115.00 – ING

According to the FX Analysis team at the ING Bank, the current reversal is just a corrective reaction ahead of further appreciation: “On USD/JPY, we do not want to miss out on a big upmove through 115.00. We have a conviction call that the Fed will have to turn more hawkish – USD positive against the low-yielders (…) We are very bullish on USD/JPY and see the correction finding support somewhere in the 113.20/70 area.” 

Technical levels to watch