USD/JPY breaks out to new highs as dollar surges and safe-havens suffer

The long-awaited OPEC deal was agreed upon on Wednesday and the 14 member-nations in the organization were able to pull together an agreement to cut daily crude oil production down by more than a million barrels to 32.5 million barrels per day. This was no easy feat, and the energy markets immediately rewarded the deal’s success by pushing up the price of crude oil by more than 8%.

The US dollar, which had already been rebounding on Wednesday after a modest pullback early in the week, continued to surge sharply as climbing oil prices provided yet another compelling signal of rising inflation and interest rates. The dollar has recently been entrenched in an exceptionally strong post-election rally due to higher bond yields and ever-increasing expectations that the Federal Reserve will raise interest rates in its December meeting as well as potentially accelerate its monetary tightening cycle.

Meanwhile, the safe-haven Japanese yen has remained in severe pullback mode as equity markets have continued to maintain the “Trump Rally” and OPEC-driven risk in the energy markets has instantly dissipated.

As a result of this further-expanded dollar-strength and persistent yen-weakness, the USD/JPY currency pair has reversed its modest losses suffered during the shallow retreat from Friday’s 8-month high, to hit a new post-OPEC high well-above the key 114.00 resistance level. With this major (but still tentative) breakout, USD/JPY has risen above an important barrier to the sharp uptrend that has been in place for the past two months.

With the OPEC deal now out of the way, the next major risk events that are very likely to have a direct impact on USD/JPY are Friday’s jobs report out of the US and the Fed’s interest rate decision in two weeks. Of course, the Italian Referendum on constitutional reform this weekend could also have an impact on safe haven assets like the yen, especially if the outcome results in the expected market turmoil.

As it currently stands, however, if USD/JPY is able to maintain above 114.00, strong upside momentum for the dollar and a lagging yen could push the pair towards its next major resistance targets at 116.00 and 118.00.

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