• USD/JPY back under 139.00 after hitting a fresh high since 1998.
• US PPI shows inflation remains the main concern.
• US dollar retreats during American hours, still up for the day across the board.

Despite risk aversion, the USD/JPY is rising more than a hundred pips on Thursday. The monetary policy divergence between the Bank of Japan and the Federal Reserve is keeping the pair on demand. After it hit a new high at 139.38, it pulled back to 138.80.

Inflation data justifies divergence in monetary policy

The US Consumer Price Index rose 9.1% (annual) in June, reaching the highest since 1981. The Producer Price Index climbed 11.3%. Both numbers came in above expectations and did not show a slowdown. With inflation running hotter-than-expected, the Federal Reserve (Fed) is seen raising rate aggressively. A 100 bps rate hike at the next meeting is now not a distant possibility.

At the same time, the Bank of Japan (BoJ) is seen continuing its ultra-easing monetary policy. The divergence between the BoJ and the Fed remains the main fuel behind the USD/JPY rally.

Not even risk aversion is helping the yen. On Thursday, the Dow Jones is falling by 1.09% (at one-month lows) and US yields are steady. Still, the Japanese yen is among the worst performers and USD/JPY is up by more than a hundred pips.

If the pair rises back above 139.00, a test of the top seems likely. Above 139.40, the next resistance could emerge at 139.70. Then attention would turn to the psychological area around 140.00. On the flip side, a consolidation below 138.80 could trigger a correction. The next support could be located at 138.15, followed by a stronger area at 137.70.

Technical levels