USD/JPY Trades With Modest Gains Near Mid-146.00s, The Highest Level Since November 2022

During Thursday's Asian session, the USD/JPY pair builds on this week's breakout momentum through the 145.00 psychological level and reaches a new yearly high. Spot prices are currently trading in the mid-146.00s, up 0.10 percent on the day, and continue to be well supported by the underlying favourable sentiment surrounding the US Dollar.

The USD Index (DXY), which measures the dollar's strength against a basket of other currencies, reaches its highest level since July 6 and confirms the overnight break through the very important 200-day Simple Moving Average (SMA) for the first time since November 30. Wednesday's stronger US macro data (Housing Starts and Industrial Production) and a more hawkish Federal Reserve (Fed) continue to operate as a tailwind for the dollar. Combined with the Bank of Japan's (BoJ) dovish stance, this further strengthens the USD/JPY pair.

The minutes of the July 25-26 FOMC policy meeting indicated that a further rate increase later this year remains possible. In addition, Fed officials no longer anticipate a "mild" recession this year, reinforcing market bets on higher rates for longer maturities and driving up US Treasury bond yields. In fact, the yield on the benchmark 10-year U.S. government bond has risen to its greatest level since October, which is believed to support the USD. The resulting widening of the US-Japan rate differential is viewed as another factor driving JPY outflows and pushing the USD/JPY exchange rate higher.

In the meantime, spot prices have surpassed the level that prompted Japanese authorities to intervene in September and October of last year. In addition, Japan's chief forex diplomat, Masato Kanda, stated on Tuesday that he would take action against excessive currency fluctuations. However, Japan's Finance Minister Shunichi Suzuki stated that the government does not target absolute currency levels when intervening in the market. In spite of this, USD/JPY could be capped by rumours that the recent weakness in the JPY could prompt authorities to engage in some posturing.

Aside from this, the prevalent risk-off environment may bolster the safe-haven JPY and discourage traders from placing fresh bullish wagers. The economic calendar for the United States will feature the usual Weekly Initial Jobless Claims data and the Philly Fed Manufacturing Index later during the early North American session. Together with US bond yields, this will impact the USD price dynamics and provide some impetus for the USD/JPY pair.