USD/JPY, rejected at 119.00, pulls back below 118.50

• The dollar pulls back from six-year highs at 119.00.
• The Japanese yen has lost about 3.5% over the last eight days.
• USD/JPY might rally as high as 125.00 – ING

The US dollar seems set to put an end to an eight-day rally on Thursday, as the pair turned down from multi-year highs at 119.00 retreating to session lows near 118.40 so far.

The US dollar treads water after Fed’s rate hike

The dollar is losing ground across the board as the market digests the rate hike and Federal Reserve’s plan to gradually increment borrowing released on Wednesday. The US Dollar Index has dropped about 0.5% so far today, to week lows right below 98.00.

The Japanese yen is taking some breather after having plummeted nearly 3.5% in less than two weeks. The monetary policy divergence between the Federal Reserve and the Bank of Japan boosted the gap between the US and Japanese yields ahead of Fed’s meeting boosting a steady USD appreciation.

From a wider perspective, however, the pair remains steady near Wednesday’s peak, with the investors awaiting the Bank of Japan’s monetary policy decision, due on Friday. The BoJ is widely expected to maintain its ultra-expansive policy which, in a context of generalized monetary tightening in most of the major central banks, might provide a fresh impulse to the US dollar.

USD/JPY might rally as high as 125.00 – ING

FX Analysts at ING expect the pair to resume its uptrend aiming to levels well past the 120.00 mark: “The clearest trend will be a higher USD/JPY, where a dovish Bank of Japan and Japan's large negative income shock from the fossil fuel rally will send USD/JPY to 120 and possibly 125 later this year. We also think the dollar can hold/build on gains against European FX too.”

Technical levels to watch