Yen slumps as Powell pledges tighter policy

The Japanese yen has started the week with sharp losses, with USD/JPY rising as high as 139.00 earlier today. In the European session, USD/JPY is trading at 138.52, up 0.75%.

The month of August can’t end soon enough for the yen, as USD/JPY has climbed 4.0%. The yen fell 0.78% on Friday, as Fed Chair Powell delivered a clear, no-nonsense message to the markets from scenic Jackson Hole.

Dollar soars after hawkish speech from Powell

Powell’s speech essentially reiterated what the Fed has been saying for weeks, but the markets reacted sharply, with equities tumbling and the US dollar recording strong gains. Investors finally acknowledged that the Fed means business and will not U-turn on policy, even if inflation drops in one or two reports. Powell appeared determined to avoid any repeats of the market euphoria after inflation declined unexpectedly in July, which raised speculation that the Fed was set to make a dovish pivot.

Powell reiterated that the Fed would continue to use all its tools to fight inflation, acknowledging that high interest rates would remain for some time, and the Fed would be careful not to ease policy prematurely. The highly-anticipated speech was unusually brief, which may have been an attempt to prevent investors from looking for some dovish remarks in the speech and ignoring the gist of the speech. Powell used strong language to get his message across – saying that Fed tightening would cause “some pain” to the economy, and avoiding soothing terminology, such as “soft landing”. The Fed plans to continue to raise rates until it’s convinced that inflation has peaked and is on the decline and judging by the market’s reaction, investors heard Powell’s message loud and clear.

US Treasury yields have moved higher, with the 2-year yield rising to 3.445% today, up from 3.032% on Friday, prior to Powell’s speech. This upward movement is weighing on the yen, which is sensitive to the US/Japan rate differential. If the upward trend continues, we could see an assault on the symbolic 140 level.

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USD/JPY Technical

• USD/JPY has broken above resistance at 1.3759 and 1.3822. Above, there is resistance at 1.3891.
• 1.3701 and 1.3632 are providing support

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