Forex Market: USD/JPY pauses rally driven by Fed rate hike bets

After a 1% surge on Monday triggered by the latest US employment data, which added to the case for a Fed rate hike in May, USD/JPY eased on Tuesday with US 10-year Treasury yields.

Futures markets are now pricing in a 71% chance of the Federal Reserve raising interest rates by another 25 basis points in May after robust US jobs data from last Friday.

Employers in all sectors of the US economy, excluding farming, added 236,000 jobs in March, compared with market expectations of 239,000, while the US unemployment rate decreased to 3.5% from 3.6% in February.

The US CPI inflation report, due to be released tomorrow, is now on investors’ radar.

“Financial markets have been too pessimistic about the U.S. economy since several small U.S. banks collapsed in March,” Commonwealth Bank of Australia strategists wrote in an investor note, cited by Reuters.

“Strong underlying CPI is likely to be the catalyst for a change in market pricing for May, and delay pricing for the start of rate cuts,” they noted.

Meanwhile, US 10-year Treasury yield eased to 3.409% on Tuesday, following a sharp two-day surge.

Long-term US yield-sensitive Japanese Yen was a notch firmer against the dollar on Tuesday, as selling pressure eased. Yesterday the Japanese currency retreated on remarks by new Bank of Japan Governor Kazuo Ueda, who pledged to continue with ultra-accommodative policy settings at his inauguration on Monday.

“The BOJ under Mr. Ueda will intentionally try to be behind the curve and push up inflation expectations a little further, so he needs to keep the exchange-rate stable,” Masayuko Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management, said.

“It is highly likely that the U.S. economy will slow down in the second half of this year, leading to lower long-term interest rates over there, and if the BOJ does something to push up long-term interest rates here, that could strengthen the yen, undoing recent positive developments in Japan,” Sumitomo Mitsui’s Kichikawa added.

As of 6:48 GMT on Tuesday USD/JPY was inching down 0.08% to trade at 133.486. Yesterday the major Forex pair went up as high as 133.870, which has been its strongest level since March 15th (135.112).