USD/JPY climbs above 159.00 as Japanese Yen sinks to ten-week low

• Can USD/JPY Extend Its Ten-Week High After Clearing Resistance at 159.00?
• Expectations of further Fed rate hikes strengthen as US inflation exceeds forecasts.
• Pressure on the Japanese Yen persists even as expectations build for further BoJ monetary tightening.

Renewed US Dollar (USD) strength is driving USD/JPY higher on Wednesday as investors increasingly price in further interest rate hikes by the Federal Reserve (Fed). At the time of writing, the pair is up 0.54% at around 159.65, a ten-week high, having decisively cleared resistance at 159.00.

Behind the US Dollar's gains are hawkish comments from Fed Governor Christopher Waller and Tuesday's stronger-than-forecast US Consumer Price Index (CPI) release. A “half-point Fed rate hike may be needed in December”, Waller warned, if monthly core inflation stayed “around 0.3% or higher.” The CPI figures released subsequently put October's core inflation at 0.3%, against a forecast of 0.2%. Headline inflation came in at 0.4%, also exceeding expectations of 0.3%.

Markets sharply revised their expectations for Fed interest rates following these developments. The CME FedWatch Tool now indicates an 85% probability of a 25-basis-point hike in December, alongside a 15% probability of a larger 50-basis-point rise.

Of greater significance for the US Dollar's appeal, the probability of a further 25-basis-point hike in January has climbed to 60%. It stood at just 19% before Tuesday's repricing.

For the Japanese Yen (JPY), growing expectations of another interest rate increase by the Bank of Japan (BoJ) in December have provided little relief. Support for additional monetary tightening increased, according to the central bank's October Summary of Opinions, but policymakers are still divided on how quickly to proceed.

As the monetary policy gap widens, the US Dollar continues to benefit. At the same time, USD/JPY's approach towards the psychologically significant 160.00 mark is raising the prospect of intervention by Japanese authorities.

Will BoJ intervention risk intensify as Dollar strength sends Yen back towards 160?

With the Yen moving back towards 160, MUFG analysts observe that it “weakened sharply yesterday in response to the US inflation data” and that “USD/JPY has returned closer to the 160-level, above which intervention becomes a much greater prospect.” ING strategists also highlight a “broadly strong dollar,” although they “increasingly think investors will be looking to acquire cheap yen should USD/JPY push above 160 again.” In ING's assessment, “all of the above can feed into the Bank of Japan's view that inflation is now stable at 2.00% and its accommodative monetary policy can be reined in,” supporting the view that policy dynamics may gradually turn more favourable for the Yen over the medium term. For now, however, the spot rate remains close to levels sensitive to intervention risk.

USD/JPY technical analysis: Can the near-term bullish bias hold?

A near-term bullish bias remains intact on USD/JPY's four-hour chart, with the pair trading at 159.68. Prices are comfortably above the 100-period and 200-period simple moving averages (SMAs), which are clustered around 157.90, as well as nearby horizontal support at 159.00. However, the Relative Strength Index (RSI) is now in overbought territory near 72, suggesting that the strong upward momentum may be becoming stretched.

The first upside hurdle lies at 159.80, followed by a more substantial barrier at 160.40, where buyers could start booking profits. Should the pair decline, 159.00 offers initial support. Further below, the 200-period SMA at 157.94 and the 100-period SMA at 157.91 bolster a wider demand zone above horizontal support at 157.50.

(The technical analysis of this story was written with the help of an AI tool. Know more.)