Introduction:
The USD/JPY exchange rate is currently on an upward trajectory in the European session, gaining traction as risk sentiment rebounds amid firmer European equities and positive US S&P 500 futures. This article explores the factors driving the surge in the USD/JPY exchange rate.
Positive Risk Sentiment Pushes USD/JPY Higher
The USD/JPY exchange rate has been on the rise as positive risk sentiment pushes traders towards higher-yielding currencies. The risk-on sentiment was spurred by firmer European equities, which bounced back after a slight dip in the previous session. In addition, the US S&P 500 futures turned positive on the day, providing further support for the USD/JPY.
Investors are optimistic about the prospects of a global economic recovery, which is expected to fuel demand for higher-yielding currencies like the USD/JPY. The rebound in the equities markets is a sign of a strengthening economic recovery, which is good news for risk-on currencies like the USD/JPY.
Factors Driving the USD/JPY Exchange Rate
Apart from positive risk sentiment, other factors are driving the surge in the USD/JPY exchange rate. One key factor is the widening interest rate differential between the US and Japan. The US Federal Reserve has maintained a relatively hawkish stance, signalling that it will begin tapering its asset purchase program soon. In contrast, the Bank of Japan has pledged to maintain its ultra-loose monetary policy until inflation reaches its target of 2%.
The widening interest rate differential makes US assets more attractive to foreign investors, which is driving demand for the US dollar. As a result, the USD/JPY exchange rate is likely to continue on an upward trajectory as the interest rate differential widens further.
Another factor driving the USD/JPY exchange rate is the ongoing US stimulus program. The US government has announced a $1.9 trillion stimulus package, which is expected to fuel economic growth and inflation. This could lead to further demand for the US dollar, as investors seek to benefit from the economic growth.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has had a significant impact on the global economy, including the USD/JPY exchange rate. The pandemic has led to widespread lockdowns and travel restrictions, which have disrupted international trade and investment.
However, the rollout of vaccines has provided hope that the global economy will recover soon, which is good news for risk-on currencies like the USD/JPY. As the global economy recovers, demand for higher-yielding currencies like the USD/JPY is likely to increase.
Conclusion
In conclusion, the USD/JPY exchange rate is currently on an upward trajectory as positive risk sentiment pushes traders towards higher-yielding currencies. The rebound in European equities and positive US S&P 500 futures are providing support for the USD/JPY. Other factors driving the exchange rate include the widening interest rate differential between the US and Japan and the ongoing US stimulus program.
