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Forex Market: USD/JPY hits a fresh one-week high as bets on more aggressive Fed tightening ramp up

USD/JPY extended gains from last Friday and hit a fresh one-week high on Monday, after robust US employment data reinforced market expectations of a more aggressive monetary policy tightening from the Federal Reserve.

Employers in all sectors of US economy, excluding the farming industry, added 528,000 job positions in July, or the most since February, while the rate of unemployment in the country dropped by 0.1% to 3.5%. July has been the 19th consecutive month of payrolls growth.

Markets are now pricing a 70.5% chance of a 75 basis point rate hike at the Fed’s September 20th-21st policy meeting, compared with 41% prior to the release of the Non-Farm Payrolls report.

This week’s focus will be on US CPI inflation data due out on Wednesday. The median analyst estimate points to annual inflation deceleration to 8.7% in July from 9.1% in June.

“It will likely take a number below 8.4% to get the odds of a 50bp hike in September as the default setting,” but that “seems unlikely,” Chris Weston, head of research at Australian brokerage Pepperstone, wrote in an investor note, cited by Reuters.

“I wouldn’t want to be short USDs if the CPI print comes in above 9%.”

The 2-year US bond yield was at 3.21% earlier on Monday, while the 10-year bond yield – at 2.81%. The negative spread between the 2-year and the 10-year yields was 40 basis points, compared with 45 basis points on Friday.

Yield curve inversion is largely considered as a pre-cursor to an economic downturn.

As of 8:04 GMT on Monday USD/JPY was inching up 0.03% to trade at 135.065. During the early phase of today’s Asian session the major Forex pair climbed as high as 135.583, which has been its strongest level since July 28th (136.579).

USD/JPY has risen 1.35% so far in August, following a 1.81% drop in July.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 134.35
R1 – 136.18
R2 – 137.33
R3 – 139.16
R4 – 140.99

S1 – 133.20
S2 – 131.37
S3 – 130.22
S4 – 129.06

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