USD/JPY just under 118.50 pre-Fed as bulls eye breakout above 2016/2017 highs

• USD/JPY continues to move higher and, just under 118.50, is on course for an eighth successive day in the green.
• The pair is eyeing a break above late-2016/early-2017 highs in the 118.60s.
• Markets are risk-on in the lead up to the Fed announcement amid signs of progress in Russo-Ukraine peace talks.

USD/JPY’s upwards trajectory over the past few sessions that saw the pair break above key resistance in the 116.40s has continued on Wednesday, with the pair coming within a whisker of hitting 118.50 for the first time since January 2017. Trading just below the half-round figure, the pair is up another 0.2% on the day and set for an eighth successive day of gains during which time the pair has rallied more than 3.0%. The sharp rally has been driven an equally steep rise in long-term US bond yields over the same period, with the 10-year yield nearing 2.20% on Wednesday from as low as the 1.60s% as recently as the start of last week.

Markets are in a very risk-on mood on Wednesday in the lead-up to the Fed policy announcement amid signs of progress in Russo-Ukraine peace talks (admittedly the reports have been mixed), reducing the demand for safe-havens like US bonds. Whilst this also reduces the haven appeal of both USD and JPY, the yen is worse hit given the upwards pressure on US yields rendering it a comparatively less attractive investment. The fact that the Fed is expected to implement its first 25bps rate hike in three years later in the day is also helping to keep yields and USD/JPY underpinned.

Any surprising Fed hawkishness, perhaps in the new Fed dot-plot, or perhaps in the tone of Fed Chair Jerome Powell’s post-meeting press conference, could be enough to trigger further US yield upside. That could see USD/JPY break above the late-2016/early-2017 highs in the 118.60s and press on towards the 120.00 mark and beyond. Conversely, if hawkish expectations aren’t met, profit-taking in wake of the recent rally could quickly see USD/JPY slide back to test old highs in the 116.40 area which should not offer strong support.