• US dollar's reversal from three-year highs at 113.75.
• The treasury yield differential is crushing the Japanese yen.
• USD/JPY's rally is targeting 114.20 – UOB.

US dollar’s pullback from fresh three-year highs at 113.75 hit earlier on Tuesday has found support at 113.45. The pair has bounced up again returning to 113.65 so far.

The yes dives on higher US Treasury yields

The greenback keeps marching higher against the Japanese yen, boosted by surging US Treasury yields on expectations the Federal Reserve will soon announce the end of its bond-buying program. The US Treasury yields have appreciated again on Tuesday, with the benchmark 10-year note reaching five-month highs above 1.60%.

Furthermore, Japanese Prime Minister Kishida’s comments this weekend confirming that there is no plan to revise the country’s tax on capital gains and dividends, which has triggered concerns about capital flows from the stock markets, might have increased negative pressure on the JPY.

All in all, the widening yield gap between the US and Japan, with the BoJ maintaining the 10-year yield near zero through a yield curve control policy, is crushing the JPY. The USD has appreciated about 4% over the last 15 days. 

USD/JPY: Next target seen at 114.20 – UOB

From a technical perspective, the FX Analysis team at UOB expects the current upside trend to extend towards 114.20:  “The impulsive surge suggests that further USD strength would not be surprising. The next resistance is at 114.20. The USD strength is deemed intact as long as it does not breach 112.40 (‘strong support’ level is markedly higher from yesterday’s level of 111.50).”

Technical levels to watch