USD/JPY rally maintained on strong dollar, yen pullback

USD/JPY continued to surge on Tuesday, extending its post-election breakout rally, as the US dollar remained well-supported and the Japanese yen continued to pull back within a risk-on market environment.

The dollar’s rally has been driven largely by expectations of greater spending and rising inflation under a Trump Administration leading to higher interest rates. Bond yields remain substantially elevated on Tuesday after the 10-year Treasury yield hit its highest level since last December on Monday, and Federal Reserve officials continue to telegraph the likelihood of an interest rate hike next month. 

As the dollar has been driven up, Donald Trump’s election victory has also led to a rally in equities and correspondingly lower market volatility after the initial spike in volatility before and shortly after the election. The market rally has generally been caused by renewed optimism towards some of Trump’s previously stated economic plans – most notably his plans to spend heavily on infrastructure and to cut taxes significantly, both of which are likely to contribute to higher inflation and interest rates.

This low market volatility, in turn, has drawn investors out of safe-haven assets like gold and the Japanese yen. The combination of a strong dollar and weakening yen has contributed to a significant market shift for USD/JPY.

Since the US election outcome, USD/JPY has rallied to break out above successively higher resistance levels, including 105.50, a key downtrend line extending back to February, and most recently, the 108.00 level. As of mid-day New York session on Tuesday, USD/JPY has already hit a new 5-month high just above 109.00. With further strength for the interest-rate-driven dollar in the run-up to the December Fed meeting, and provided there continues to be a low-volatility, risk-on market environment in the near-term, USD/JPY could have significantly further to run towards the next major upside target around the key 111.00 resistance level.

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