The outgoing week was marked by a continued rise in bond yields of developed countries and hawkish reassessment of the Fed’s interest rate path. At the same time, greenback demand rose, while for the currencies of countries with low interest rates, as well as countries dependent on imports of commodities, it decreased. EURUSD found equilibrium at the end of the week in the range of 1.08-1.09, while USDJPY approached the recent local maximum in the 125 area.

Speculation continues about what level of depreciation of the yen the Bank of Japan considers unacceptable and will start interventions. However, so far there are few incentives for the Central Bank to keep the yen from falling. Inflation, although relatively high, is lower than in Europe or the US, and commodity inflation makes the main contribution to it (even more than in the EU):

Since Japan is heavily dependent on imports of resources, there are few ways to effectively contain such inflation. The recent actions of the Central Bank on "unlimited" purchases in the bond market shows that the regulator remains set to maintain soft credit conditions to stimulate output in the economy. For these reasons, it is very likely that the USDJPY rally will continue (130 on the horizon), with a breakout of 125 expected next week.

Bullish momentum has waned markedly in commodity-exporting currencies amid signs of easing of commodity markets rally. As currencies of countries heavily dependent on trade with China, the AUD and NZD are also feeling hit by the coronavirus outbreak in the country, which has led to lockdowns painful for economy and trade. As long as China maintains a “zero covid” policy in regards to outbreaks of the pandemic, the upside potential for the AUD and NZD looks limited.

The sovereign debt market of developed countries again came under pressure this week. The yields of short-term bonds of Germany and the US, a proxy for market expectations of how central banks rates will rise, hit new local highs:

Fed policymaker James Bullard said this week that raising interest rate to 3% this year looks reasonable. There is some progress in the normalization of ECB policy - published "Minutes" showed that ECB policymakers at the last meeting talked about several rate hikes this year and adjustments to the APP (the main asset purchase program at the moment). However, the reassessment of the Fed's policy this year is more active, due to fewer objective constraints on the Fed to normalize policy (for example, much lower risks of creating stagflation). That is why the attempts of upward EURUSD corrections to morph into a bullish trend have been futile so far. The Euro also has a large geopolitical premium – investors are demanding higher returns on local assets due to the risks associated with military operations in Ukraine.

EURUSD is likely to retest 1.08 next week, however, to continue the bearish trend, a significant increase in geopolitical risks or new worrying inflation data will be required. At this stage, it will be difficult to surprise the markets. Therefore, a bet on a technical rebound of EURUSD with a target at 1.095 looks justified: