USD/JPY climbs near 132.50s after reaching a 20-year high around 133.00

• The USD/JPY continues extending its weekly gains to 1.29%.
• A risk-on mood, and high US Treasury yields, boost the USD/JPY.
• The BoJ to keep the ultraloose monetary policy stance, despite yen weakness.
• USD/JPY Price Forecast: To retreat towards 132.00, as bulls prepare an attack towards 135.16

The USD/JPY rallied for the third straight day and reached a 20-year high at 133.00, a level last seen in April of 2002, amidst an upbeat market mood and also propelled by higher US Treasury yields. Nevertheless, the USD/JPY is retreating towards 132.50 at the time of writing, up by 0.49%.

Upbeat sentiment and elevated US Treasury yields tailwind for the USD/JPY

The market sentiment is mixed, as European bourses edge down, while in the States, equities are rising. In the meantime, the US 10-year Treasury yield is below the 3% threshold, post-Monday jump, down seven bps, sitting at 2.974%.

Tuesday’s overnight session witnessed the Reserve Bank of Australia (RBA) adding its name to the list of global central banks, surprisingly hiking 50 bps, its overnight cash rate. The Central Bank said they would do “what is necessary” to tame inflation. So a scenario with higher yields, and a global economic slowdown, put the stagflation outlook on the table.

Earlier, the World Bank lowered the global growth forecast to 2.9% from 4.1% in January. World Bank President David Malpass said that the risks of stagflation, the Russo-Ukraine war, and lockdowns in China have been hammering growth and that a recession will be hard to avoid for many countries. Meanwhile, though global inflation is expected to moderate next year, it will likely remain above target in many economies.“

In the meantime, during the Asia session, the Japanese docket reported weaker than expected data, particularly household spending. The reading rose by -1.7% YoY vs. -0.6% estimated. With no wage pressures in the near future, the Bank of Japan (BoJ) made it clear to maintain its loose policy stance.

The monetary policy divergences will continue to widen, leading to continued yen weakness. Governor Kuroda walked back his comments yesterday regarding greater tolerance on the part of consumers to accept higher prices, noting, “I didn’t necessarily say it in an appropriate way.” Officials have the tricky task of explaining exactly why exiting years of deflation should be welcome. April leading and coincident indexes were also reported.

The US economic docket is absent, though on Thursday will feature the Initial Jobless Claims and Continuing claims. By Friday, US inflationary readings alongside Consumer Confidence would shed some light on the current economic conditions.

Therefore, the USD/JPY remains upward biased, pressured by higher US Treasury yields. The spread between both countries’ 2-year yields continues to widen, so USD/JPY traders could expect additional buying pressure unless Japanese authorities threaten to make verbal interventions or do intervene in the FX market.

USD/JPY Price Forecast: Technical outlook

The USD/JPY retreats from the 133.00 figure, eyeing to form an “inverted hammer” candlestick. Also, the Relative Strength Index (RSI) at 71 in the overbought territory might deter USD/JPY buyers from increasing or opening fresh longs positions due to the overextended price action. Due to increased volatility in the pair, the USD/JPY might be subject to a mean reversion move.

Therefore, using the Bollinger’s band indicator, a move towards the top band around 131.97 lurks as USD/JPY bulls take a breather before pushing towards the January 2002 high around 135.16.

That said, the USD/JPY first support would be the June 6 high at 132.01. Break below would expose the previously-mentioned band at 131.97.