USD/JPY rallies above 133.40 on geopolitical jitters, Fed commentary

• Safe-haven flows bolstered the greenback, a tailwind for the USD/JPY.
• US House Rep. Pelosi’s trip to Taiwan escalates China-US tensions.
• USD/JPY traders should be aware of Japan and US Services and Composite PMIs.

The USD/JPY begins Wednesday’s Asian session on the right foot, amidst a risk-off impulse spurred by geopolitical tensions between China and the US, triggered by the trip of US House Speaker Pelosi to Taiwan, alongside a hawkish push by Fed policymakers.

Therefore, the USD/JPY is trading at 133.48, after hitting a weekly low on August 2 at 130.39, with buyers stepping in around the 100-day EMA at 130.37, lifting the major to current price levels.

USD/JPY got bolstered by safe-haven flows

During the US session, Fed speakers pushed back against a so-called “dovish” tilt, according to the market’s reaction to the US central bank’s 75 bps rate hike. Nevertheless, the San Francisco Fed President, Mary Daly, said that work in inflation is nowhere near almost done, and there is still a long way to go. In the same tone, Cleveland’s Fed President Mary Daly said that she hadn’t seen anything suggesting that inflation is leveling off and foresees prices would not come down quickly.

In the meantime, Chicago’s Fed President Charles Evans said a 50 bps is reasonable in September, but he didn’t discount a 75 bps if inflation remains stubbornly sticky.

The US bond market reacted to Fed policymakers and sent US 2-year bond yields above the 3% threshold. In comparison, the US 10-year benchmark note rate stayed around 2.74%, further deepening the yield curve inversion as traders discount a US recession.

Late in the North American session, US President Joe Biden signed the US chip production bill, aimed to compete with China.

What to watch

The Japanese economic docket will feature the Jibun Bank Services and Composite PMIs for July on its final readings. Expectations lie at 51.2 and 50.6, respectively.

The US calendar will feature July’s ISM Non-Manufacturing Business Activity is expected to decelerate to 52.5, alongside Factory Orders and Fed speakers, led by Philadelphia’s Fed Patrick Harker.

USD/JPY Key Technical Levels