USD/JPY pushes to new multi-year highs above 121.00, supported by stream of hawkish Fed speak

• USD/JPY continues to trade with an upside bias and is now above 121.00 and at fresh multi-year highs.
• The pair’s gains on the month now stand at an impressive 5.3%, though it is looking technically overbought.
• Wednesday’s upside reflects a continued stream of hawkish Fed speak, with upside momentum in US yields having eased.

USD/JPY continues to trade with an upside bias and, though having pulled back from fresh multi-year highs it hit above 121.40 earlier in the day, remains support above 121 and trading with on-the-day gains of about 0.25%. Though subdued price action in US bond market (meaning unchanged yields) removes one major tailwind for the pair, higher oil prices with US President Joe Biden due to arrive in Europe on Wednesday and Western nations subsequently expected to announce new sanctions against Russia is undermining the yen. The US is net crude oil exporter, shielding the buck from the negative impact oil price upside, whereas Japan is a big net energy importer.

Wednesday’s upside may also be a reflection of a continued and steady stream of Fed speak, with policymakers indicating their desire to support/openness towards larger 50bps rate hikes at upcoming meetings. This is reinforcing the hawkish message conveyed by Fed Chair Jerome Powell on Monday and is underpinning the US dollar even if the move higher in US yields has run out of steam. Either way, USD/JPY’s rally abve 121.00 on Wednesday takes its on-the-month gains to now roughly 5.3%.

The hawkish shift from the Fed serving to ensure that US bonds cannot be used as a safe haven amid the ongoing Russo-Ukraine conflict, making a significant reversal lower in yields unlikely. Higher yields mean the US dollar is the haven of choice to hedge geopolitical risk, as opposed to the yen. That, combined with the aforementioned vulnerability of the Japanese economy to high energy prices, means the outlook for a sustained drop in USD/JPY isn’t great, even though by many metrics, the pair is very overbought.

USD/JPY’s 14-Day Relative Strength Index score hit 83.50 on Wednesday, its highest since late 2016. A score above 70.00 is considered overbought. While that does suggest some profit-taking and consolidation likely lays ahead, the RSI’s ability to predict a turnaround has been patchy over the last two years. Looking to the rest of the week, more Fed speak, flash March US PMIs and Japanese Tokyo inflation data will all be worth watching, while traders continue to monitor geopolitical developments.