USD/JPY clocks fresh 2-month high on Fed-BOJ monetary policy divergence

The American Dollar stands tall, this Monday morning in Asia after Friday’s jobs report signaled that the Federal Reserve would stick with its tightening plans for the rest of this year.

The Dollar-Yen pair clocked a two-month high of 114.20. The pair opened the week at 113.86 levels.

Friday’s solid jobs report not only boosted Dec rate hike bets, but also meant the Fed would announce that it is prepared to reduce its balance sheet size. The 10-year treasury yield clocked a eight-week high of 2.398% on Friday and currently trades around 2.39%.

Meanwhile, on Friday, the Bank of Japan boosted its bond purchases in order to keep the 10-year yield near zero percent as decided under the yield curve control policy. BOJ’s actions suggest it is in no hurry to exit its policy. BOJ Governor Kuroda made it clear this Monday morning that the bank intends to run the QQE with yield curve control for as long as needed.

Thus, both banks stand poles apart with their respective monetary policies. The divergence favors further gains in the USD/JPY. As of now, markets are also willing to look through US-North Korea tensions, which also keep the Yen bulls at bay.

USD/JPY Technical Levels

A break above 114.36 (May high) would expose resistance at 114.75 (127.2% Fib ext. of June 14 low - June 20 high - June 22 low) and 115.00 (zero levels). On the other hand, a breakdown of support at 113.86 could yield a pullback to 113.56 (5-DMA) and 113.04 (10-DMA). The daily RSI is now overbought, hence a technical pullback could be seen.