USD/JPY breaks out towards 160, raising intervention concerns

USD/JPY is holding steady after breaking out of its recent trading pattern in the previous session, rising to a 10-week high of 159.80, just a breath away from the 160 intervention zone.

The U.S. dollar has risen against its major peers, supported by stronger-than-expected U.S. inflation data and hawkish Fed signals. Headline U.S. CPI rose 0.4% versus 0.3% expected, while core CPI rose 0.3% versus 0.2% expected.

Federal Reserve Governor Christopher Waller brought the prospect of a 50-basis-point rate hike in December to the table. As a result, the market has fully priced in a 25-basis-point hike next month, alongside a 10% probability of a 50-basis-point rate increase.

U.S. Treasury yields jumped to 5% on Tuesday, although the Treasury market was closed yesterday for Veterans Day. Yields remain elevated at 4.99% today.

Higher yields and expectations of further rate hikes from the Fed are supporting the U.S. dollar. At the same time, the yen continues to meander amid a lack of hawkish conviction from the BoJ.

Interestingly, the U.S. dollar is continuing to hold firm despite an improvement in risk sentiment. U.S. equities rebounded, with the Nasdaq closing 1.6% higher.

Looking ahead, attention will turn to multiple Fed speakers today, including Hammack and Daly, for further clues on the pace of monetary policy tightening. U.S. jobless claims are expected to remain low at 195K, while U.S. PPI data is due tomorrow.

Yen struggles amid widening BoJ-Fed rates outlook

The Japanese yen has suffered at the hands of a stronger dollar. BoJ Governor Kazuo Ueda has kept the door open to further hikes after the central bank held rates steady at its October meeting. However, the prospect of more aggressive Fed tightening risks widening U.S.-Japanese rate differentials again, adding downward pressure on the yen.

The yen remains hostage to shifting Fed expectations, even as the BoJ considers further rate hikes.

The pair is closing in on 160, prompting Japan's chief currency official, Atsushi Mimura, to highlight concerns over the pace of currency moves in recent days and warn that it is too soon to forget about intervention, as seen over the summer.

A break above 160 could see Japanese officials ramp up warnings and test their tolerance, with the level potentially acting as a line in the sand.

USD/JPY technical analysis

After trading in a holding pattern since late September, capped on the upside by 159 and supported on the downside by 157.25, USD/JPY broke above 159, rising to 159.75 at the time of writing. The pair is now testing the 61.8% Fibonacci retracement of the move from the 164 high to the 152.90 low.

Buyers, supported by momentum, will look to rise above this resistance to test the 160 level, last tested in late August, which is also a possible intervention level for Japanese authorities. Above here, attention turns to the 78.6% Fibonacci retracement at 161.60, before buyers look towards 163.99, the 2026 high.

Failure to break above the 61.8% Fibonacci retracement at 159.75 could see the pair fall back to test 159 and 158.44, the 50% Fibonacci retracement. A break below here would turn attention to 157.20, the lower boundary of the holding pattern. A downside breakout would be confirmed by a break below this level, bringing 155.50 into focus, the 23.6% Fibonacci level and an area of support in July and May.