USD/JPY Forecast: Yen Weakens as Powell's Dovish Tone Impacts Yields

Dovish Powell Leads U.S. Treasury Yields as Japanese Yields Fall - Putting Pressure on Yen

Jerome Powell continued to suggest that things are improving, setting the stage for the Fed's first rate cut since the start of the rate hike cycle in 2022. The Fed Chairman reiterated that the Fed will not wait until inflation reaches the all-important 2% market level before cutting rates, as monetary policy operates with a variable lag.

Powell added that the committee expects more of the same from economic data, as parts of the labor market show signs of slowing, economic growth has slowed and inflation continues to move lower.

Despite this, the US dollar has not weakened despite the recent sharp fall in the greenback caused by last week's lower US inflation data. However, this morning, US Treasury yields have led the way down for other major currencies, with Japanese yields following suit. 10-year Treasury yields are now near three-week lows, close to the 1% ceiling. Later this month, the Bank of Japan (BoJ) will meet for a possible interest rate hike and has promised to reveal more details about its bond tapering program.

Japanese Government Bond Yields (10-Year)

USD/JPY has become the subject of much controversy after official data from the Bank of Japan showed it may have used 3.57 trillion yen to boost the yen. Officials declined to comment on whether this was a targeted FX intervention and continued to emphasise that recent JPY weakness is undesirable.

The pair seems to have found temporary support at the blue 50-day moving average, where it continues to be bullish, again highlighting the 160.00 handle. The pair could consolidate and tend to trade sideways if further signs of a Fed rate cut emerge, but this seems unlikely given that interest rate differentials continue to work against the Japanese yen. In any case, 155.00 remains the next support level.