USD/JPY bulls step in at daily support, sights on monthly resistance

• USD/JPY is under pressure as the high yielding currencies slump.
• Central bank rhetoric is less hawkish, giving rise to strength in the yen.

The yen has benefitted from an unwind of the higher-yielding currencies following the central bank meetings from last week with all three, the Reserve Bank of Australia, the Federal Reserve and the Bank of England, emphasising the transitory nature of inflation. Consequently, the US dollar fell and the yen gained over 5% on the final two days of trade last week.

At the time of writing, USD/JPY is trading flat for the open and is supported at a low of 113.32 and a high of 113.44 so far. The expectations of how far interest rates may rise were reined in last week and this took residence over a solid Nonfarm Payrolls report that failed to support the greenback following an initial surge on the release of the data. DXY, which measures the greenback against a basket of six rivals, rose as high as 94.634 after the jobs report, its firmest since Sept. 25, 2020.

US dollar under pressure

However, risk apatite took off and US stocks staged a broad rally. This weighed the greenback and enabled the yen to add to gains made earlier in the week. The dollar dropped to 94.118 but was still up around 0.1% for the week. However, on Wednesday, Fed Chair Jerome Powell said he was in no rush to hike borrowing costs, as there was "still ground to cover to reach maximum employment." The central bank had also announced a $15 billion monthly tapering of its $120 billion in monthly asset purchases.

''Bearish market positioning unwound,'' analysts at ANZ Bank explained in a note at the start of the week. ''Central banks are still hesitant, believing that current inflation pressures, whilst proving more lasting than initially thought, will pass.'' This has seen the US 10-year yield crumble from a restest of the daily counter-trendline into the 1.4550% territory. The more central bank sensitive yield, the 2-year fell a whopping 5.37% on the day on Friday.

US CPI in focus

This puts US inflation data on the radar this week. US Consumer Price Index is expected to slow significantly in 2022 by analysts at TD Securities as fiscal stimulus fades and supply constraints ease, but we don't expect the data to be validated in the very near term. ''The CPI probably rose rapidly in October, reflecting a surge in energy prices and a resumption of the uptrend in used vehicle prices after two declines. The health insurance part likely picked up as well,'' the analysts argued.