The dollar will find it hard to regain momentum unless there is a significant move higher in US yields. With concerns surrounding capital repatriation to Japan and US political uncertainties, USD/JPY is liable to drift towards key support just above 111.60.
USD/JPY was trapped below the 113.00 resistance area in US trading on Monday even with a generally confident tone from Federal Reserve officials.
Chicago Fed President Evans stated that further two rate increases were realistic during 2017 and a total of four increases was a possibility if the economy really took off, although the outcome would depend in part on fiscal policy developments.
Evans also commented that it was acceptable to see inflation slightly above 2% given that the Fed had symmetric target around 2%. He also stated that the Fed would consider at the June meeting whether or not to increase interest rates again which appeared to rule out a move at the May meeting. The dollar overall was unable to gain any significant traction from the commentary as US Treasuries remained well supported with the 10-year yield dipping to below 2.48%.
The decline in bond yields had an impact in curbing USD/JPY buying interest with a drift lower to test the 112.50 support area.
There were further concerns surrounding US trade issues following the G20 meeting with the potential for Japan to be seen as a target by the US Administration.
Wider US political concerns also had an impact with the House of Representatives facing a crucial debate on the proposed replacement for the Affordable Care Act while President Trump’s approval ratings continued to decline.
USD/JPY dipped to lows near 112.30 in Asian trading on Tuesday before recovering to the 112.70 area as US 10-year yields attempted to regain the 2.50% level.
Overall dollar buying support was still lacklustre and USD/JPY retreated towards 112.50 ahead of the US open as the US currency’s trade-weighted index declined to six-week lows.
The US economic calendar remains light in the short term with markets continuing to focus on political developments. There is also likely to be speculation over capital repatriation flows to Japan ahead of the fiscal year-end.
The dollar should still be resilient given underlying yield spreads unless there is a sharp deterioration in global risk appetite and downward pressure on equity markets.
USD/JPY 4-Hour Chart