Japanese Yen’s Weakness Pricing More Hawkish Tones from ECB and Fed

The dollar climbed to 130.99 yen earlier on Monday, setting a fresh one-month high, and not far from last month's 20-year peak of 131.34, after gaining almost 3% last week. The euro also keeps rising against the Japanese currency while hitting 140.38 yen thereby extending a 7-year high hit last week.

The combination of higher Treasury yields and lower equity prices strengthens the dollar's safe-haven case for now, while the euro is supported by expectations of a more hawkish tone from the ECB next week. There is some market speculation the ECB could start with a large 50 basis point rise, after euro zone inflation rose to yet another record high in May. Markets are currently pricing in 125 basis points of hikes at the ECB's 4 scheduled meetings this year.

Options-triggered bids above 131 and take-profits above a yearly high of 131.35 in the dollar/yen pair should give the pair additional momentum, although selling by Japanese investors and foreign investors could slow gains.

Technically, the dollar-yen move above the double top at the high of 2022 is likely to lead to a set of upward momentum, as the target at 135 will be restored in that case. If it fails to break through the level, then the rate will retreat to the top of the Ichimoku cloud, which currently stands at 127.70. In the longer term, the pair has already broken the long-term 76.4% Fibonacci level from the 1998 high to the 2011 low at 130.60 and looks set to move towards 147 on the monthly charts as a bullish reverse head and shoulders is forming. Against the euro and other crosses, the yen is completing a bullish wedge break and may be oversold in the coming sessions.