USD/JPY Technical Analysis: Attention to the Content of the FOMC Minutes

• Increasing expectations about the future of raising US interest rates helped the bulls of the USD/JPY currency pair to move toward the 135.22 resistance level yesterday.
• This is the highest for the currency pair in two months, this week's trading, as an extension of the bullish performance last week.
• Today, investors will get a view of the future of raising US interest rates from the minutes of the last meeting of the US Federal Reserve later in the day.

Wall Street traders have fully priced in quarter-point increases at both upcoming Fed meetings — and the eventual higher peak in interest rates. So the index swap contract for one night in May rose to 5.11 percent, more than 50 basis points above the current effective federal funds rate. The market also priced in the so-called final interest rate, with the July contract rising to 5.31 percent, reflecting a nearly 70 percent chance of a third quarter-point hike in June.

The moves were accompanied by the recent increase in US Treasury yields to their highest levels during the year, as yields on two-year bonds rose by as much as 7 basis points to 4.71 percent, within 10 basis points of their highest levels in several years in November. Treasury yields erased their early rally and fell 2 to 5 basis points across the curve in late New York trading, with the turnaround reflecting the squaring of an oversold market ahead of the long weekend. The two-year sensitive policy was sharply higher over the week, up from 4.52 percent.

In remarks on Friday, Fed Governor Michelle Bowman said the US central bank should continue to raise interest rates to reduce inflation, which remains "very high." The upward shift in market expectations of the Fed's policy path was driven by economic reports showing a tight labor market and inflation that was firmer than the market had expected at the start of the year.

Economists at Bank of America and Goldman Sachs recently revised their forecasts for Fed policy to include a rate hike in June to follow moves in March and May. For his part, Seth Carpenter, chief global economist at Morgan Stanley, told Bloomberg Television that more data showing that the strength in January "wasn't anomalous" would increase pressure on the US Federal Reserve to accelerate its pace. He said another business report similar to last month would prompt policymakers to consider returning to half-point increases. Two officials indicated on Thursday that they were open to that.

For its part, the US Federal Reserve has raised its policy rate eight times since March 2022, the latest of which was in a range of 4.5 percent - 4.75 percent on February 1, after the lower limit had fallen to around 0 percent at the start of the pandemic. The central bank indicated at the end of last year an expected peak of 5.1 percent for policy and no interest rate cuts in 2023.

Traders with swaps covering the December Fed meeting cut the odds of a quarter-point rate cut from the peak by the end of the year to about 75 percent.

USD/JPY Forecast:

The general direction of the USD/JPY currency pair is still bullish, and its recent gains moved the technical indicators toward overbought levels. It does not rule out more gains if the dollar gets more positive momentum from the signs of raising US interest rates and more positive numbers for the sectors of the economy. America, especially with regard to inflation. Currently, the closest resistance levels for the currency pair are 135.30 and 137.00, respectively.

On the other hand, according to the performance on the daily chart, the bears will not return to control the trend without moving towards and below the support level of 131.60.