USD/JPY held steady-to-lower levels and should remain above big options expiries at 105 before Jerome Powell's policy speech on Thursday nL1N2FM1N1, but it could fall below there if the Fed chair's economic view darkens enough to rekindle negative-rates speculation.
Weighing on the dollar were expectations that the Fed will formalize a shift to average inflation targeting, allowing price growth to rise above its 2% goal to compensate for time spent below.
The implication is the Fed, with its funds target rate already only at 0-25bp, would depress Treasury yields by committing to keep the funds rate near zero until inflation targeting and full employment goals have been met.
These policy changes are now largely reflected in Treasury and TIPS yields, and the dollar's drop from March.
Unless Powell raises negative rates speculation, 105 should hold USD/JPY, but 107 supply should cap.
USD/JPY was supported on Friday by solid Markit PMIs and a record rise in existing home sales, but the dollar and yen were broadly lower on Monday amid risk-on flows, purportedly due to COVID-19 treatment hopes nL1N2FP0B8 and resumption of the downtrend since March highs.
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