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  • USD/JPY dropped sharply from Asia Pacific levels around 109.75 to lows around 109.00 before recovering to closer to 109.25.
  • A tightening US/Japan rate spread has put downwards pressure on the pair.

USD/JPY dropped sharply on Thursday, sliding from Asia Pacific levels around 109.75, to as low as the 109.00 mark, after slipping below the 21-day moving average at just under 109.50. The pair is currently trading closer to 109.25 as US trade draws to a close, down about 0.5% or just over 50 pips on the day.

Now that USD/JPY has slipped below a key area of support in the 109.30s, short-term bears will be targeting a move towards the mid-March lows in the 108.30s. This would require the pair to break below support in the form of the psychologically important 109.00 level first, something which it has not been able to do as of yet.

Driving the day

US government bond yields have been on the back foot on Thursday, with the 10-year yield down just over 2bps to trade around 1.63%. That marks a more than 10bps drop since the start of the month, a move which has put downwards pressure on the US/Japan rate differential, which is bearish for USD/JPY. But USD has not just been struggling against the yen. In fact, the currency sits at the bottom of Thursday’s G10 performance table.

Most recently, USD saw selling pressure in wake of remarks from Fed Chair Jerome Powell; speaking at an IMF panel, Powell said that the outlook for the US economy has brightened as a result of fiscal support and vaccines. However, Powell noted that the slower pace of global vaccinations and the recent rise in Covid-19 infections in the US are both risks to the recent progress that has been made, and that he expects a rise in Covid-19 cases to slow the economic recovery. Powell noted that while fiscal and monetary support have helped the US economy avoid a lot of scarring, the economy continues to need support, before adding that millions of people will have a hard time getting back into the workforce. In reference to the recent strong jobs report, Powell said the Fed would want to see a string of months like the March jobs report to see progress towards its goals, before pointing out that the unemployment rate in the bottom quartile of the economy is still 20%.

In sum then, Powell’s remarks on the economy were dovish, hence the weakness in USD; he acknowledged but seemed to play down recent strong data and the recent improvement in the economy’s economic outlook, while coming across as eager to emphasise that the economy remains a long way from the Fed’s goals (as expected). Moving on to Powell’s remarks on inflation; he noted that a one-time increase in inflation is different from a persistent increase in inflation, which he defined as inflation going up “year after year after year”. In that vein, Powell reiterated that the upwards price pressures later this year are most likely to be temporary, in other words, saying that the Fed is not going to be worried by the pickup in inflation and will stick to its guns with regards to easy monetary conditions. These comments, whilst nothing new, also seem to have contributed to the dovish tone of Powell’s remarks.

Looking ahead, the main event for US dollar traders to keep an eye on for the rest of the week is Friday’s Producer Price Inflation report for the month of March. A higher-than-expected inflation number could provide some upside impetus to inflation-sensitive bond yields, which could put some upwards pressure on USD/JPY. However, it does feel as though USD is in the mood to head lower and Friday’s data might well go under the radar.