USD/JPY Upside Potential Supported by Hawkish Fed Remarks

Following the recent surge to a two-month high, USD bulls are choosing to secure some profits as US Treasury bond yields retreat. This decision, coupled with a slightly overbought Relative Strength Index (RSI) on the daily chart, leads to unwinding of long positions in the USD/JPY pair. However, the downside for the USD is cushioned by expectations that the Federal Reserve (Fed) will maintain higher interest rates for an extended period.

Market pricing currently indicates a higher likelihood of a 25 basis points rate increase at the upcoming FOMC monetary policy meeting in June. This sentiment is reinforced by recent hawkish comments from influential Fed officials and the release of the US Core PCE Price Index, which revealed persistent inflation. Such factors are expected to act as tailwinds for the USD and support the potential for dip-buying in the USD/JPY pair.

Meanwhile, Bank of Japan Governor Kazuo Ueda has stated that the central bank will continue its easing measures through yield curve control. Additionally, the Tokyo Consumer Price Index (CPI) for May, released last Friday, showed a lower-than-expected inflation rate in Japan's capital city. This aligns with the BoJ's view that inflation in Japan is likely to fall below the 2% target in the middle of the current fiscal year, allowing the central bank to maintain its dovish stance.

With a positive risk sentiment prevailing, the safe-haven Japanese Yen (JPY) may face pressure, limiting the downside for the USD/JPY pair. Furthermore, US lawmakers have indicated a tentative agreement to suspend the US government's debt ceiling until January 25, thus averting a potential default by the world's largest economy. This development boosts investor confidence, evident from the positive mood in equity markets, and drives capital away from traditional safe-haven assets, including the JPY.

Considering the aforementioned fundamental backdrop, the path of least resistance for the USD/JPY pair appears to be on the upside. Based on our analysis, we anticipate a potential pullback at the 61.8% Fibonacci level, which could initiate a new bullish impulse in alignment with the prevailing uptrend.

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The USD/JPY currency pair is currently experiencing challenges in reflecting the market's mildly negative sentiment. It also appears hesitant in validating the recent comments made by the Governor of the Bank of Japan, Kazuo Ueda, against the backdrop of a lackluster Wednesday morning in Europe. Our analysis suggests the possibility of a potential pullback around the 61.8% Fibonacci level, which coincides with a strong support area. This convergence indicates that the price may undergo a fresh pullback in the near future.