• Powell’s testimony and Fed rate hike influence USD/JPY, which remains underpinned by high US bond yields.
• Further USD/JPY upside is expected as BoJ members support monetary easing.
• Key data: US unemployment claims, Fed speakers, and BoJ member Noguchi’s speech.

The USD/JPY exchanges hands at around the 142.00 handle on Wednesday, after hitting a low of 141.28, as the Federal Reserve (Fed) Chair Jerome Powell’s two-day testimony in the US Congress begins. Risk aversion is another of the drivers of the day while US Treasury bond yields, rise.

Market odds favor Fed rate hike in July; dovish BoJ remakers keep JPY subdued

Following the latest week’s monetary policy, Powell struck the markets with a balanced press conference, though tilted dovish as seen by the market’s reaction. Since then, Fed officials have stressed the need to curb inflation to its 2% target, as said recently by Vice-Chair Nominee Philip Jefferson and the Fed board nominee member Lisa Cook.

Traders’ odds for a 25 basis point rate hike by the Fed lie at 81.8%, as shown by the CME FedWatch Tool. Nevertheless, market participants are not expecting an additional increase, as they see rates peaking at 5.25%-5.50%, contrary to the Fed’s dot-plots, revealed in the Summary of Economic Projections (SEP).

In the meantime, the USD/JPY remains underpinned by US Treasury bond yields, namely the 10-year benchmark note, gaining four and a half basis points, up at 3.769%. The US Dollar Index, which measures a basket of six currencies vs. the greenback, surprisingly tumbles 0.16%, at 102.367.

Meanwhile, at the time of writing, Fed Chair Powell is answering questions at a hearing at the Capitol. He said that “it may make sense to move rates higher, at a moderate pace,” and emphasized the speed and level of rates “are separate.”

Aside from this, Bank of Japan (BoJ) members leaned dovish, as April’s meeting minutes showed members mentioning that it is important to continue with monetary easing. Some members stressed that past price increases are passed on to consumer prices with a lag.

In the meantime, during the Asian session, the BoJ Governor Kazuo Ueda commented the economy is picking up moderately, though the central bank will maintain the monetary policy as it stands. BoJ Board member Adachi commented that inflation is faster than he expected but added it’s too early to tweak “easy” monetary policy. Adachi sees upside and downside risks to the price outlook, but downside risks are more extensive in the long term, suggesting that it’s appropriate to continue monetary easing.

Given the backdrop, the USD/JPY would likely continue to uptrend, though Japanese authorities would scrutinize the pair. Lately, they have been vocal about the exchange rate, so USD/JPY buyers must know that an intervention can occur