USD/JPY looking to try and establish that next breakout leg

For the past few weeks, buyers have struggled to really clear a break above the 135.00 mark with the highs capped around the region of 136.70 to 137.00. The latest attempt today may also fall short but buyers are at least continuing to keep more poised and knocking on the door of a push higher in the pair.

The high today hit 137.27, which is the highest since September 1998. From the monthly chart itself, the pair looks to have established itself on the way up towards 140.00 next at least.

However, the price action in the past few weeks is less suggestive of that and has more of a hint of a potential pause. So, what gives?

Ultimately, the question that needs answering most is whether or not we have seen a peak in bond/Treasury yields.

It all boils down to what the market narrative is focusing on and it hasn’t been all that clear in the past few weeks. I reckon the indecision in USD/JPY in breaking out to the topside is but a reflection of that sentiment as well.

10-year Treasury yields appear to have hit a peak near 3.50% last month. Since then, there has been ongoing choppiness and while yields aren’t pushing to trend lower, it is tough to call for higher yields now than what it has been in the months before.

So, what has changed?

For one, the focus isn’t solely on inflation anymore. Breakevens have come down and markets are looking past central bank tightening somewhat already. Sure, the Fed is still going to deliver many more rate hikes but a lot of that is priced in and the market seems more focused on the overview rather than the details at this stage.

The question of the terminal rate and when the Fed will turn amid recession risks looks to be the more important points of discussion at the moment. And so far, market players are convinced that it will come into play much faster than what policymakers expect.

If so, that’s a big point of contention for the bond market and as much yields are to stay elevated, we could be starting to pick at a potential turnaround in sentiment in the months ahead.

In turn, as much as USD/JPY still looks poised for a further upside push, the lack of assistance from the bond market may make it tougher to chase any extended bullish runs from here – not unless yields threaten to burst higher again.