The USD/JPY pair continues to delight buyers and dollar bulls, remaining in a steady upward trend since January 2021. Moreover, its growth accelerated in March of this year, after the Fed raised the interest rate for the first time in 2 years (to 0.50% from 0.25% at that time). In May, the Fed raised interest rates again, by 0.50% all at once, and announced the start of a reduction in its $9 trillion asset balance in June.

The US central bank typically raises rates by 0.25% at a time, and the last half percentage point hike was in 2000. Now the Fed is pursuing the most aggressive tightening of monetary policy in decades, rapidly winding down stimulus measures that have fueled inflationary pressures. The actions of the central bank are aimed primarily at fighting inflation, which has reached a maximum in four decades. "The committee is very carefully assessing inflation risks," the central bank said.

"Inflation is too high, and we understand what difficulties it causes. We are taking prompt action to reduce it," Fed Chairman Jerome Powell said at a press conference following the May meeting.

Now the Fed interest rate is at 1.75%, and market participants expect further tightening of monetary policy in the US.

As New York Fed President John Williams said yesterday, it's prudent to go to 3.50%–4.00% of the federal funds rate this year and then to 3.50%–4.00% next year. According to him, at the July meeting of the Fed, the issue of raising by 50 or 75 bps will be discussed, and a change in the rate by 75 bps was right.

In anticipation of further steps from the Fed to tighten its monetary policy, the dollar continues to strengthen. As of this writing, DXY futures are trading near the 104.34 mark, maintaining positive dynamics and moving towards the recent local high of 105.56. Its breakdown could drive the DXY further up towards multi-year record highs of 121.29 and 129.05, hit in June 2001 and November 1985, respectively.

But even if the dollar index does not reach these levels, its dynamics will still be characterized as bullish for the time being, and the USD/JPY pair will retain the potential for further growth. Here, the main driver of the positive dynamics of USD/JPY is the difference in the approach to determining the parameters of the monetary policies of the Fed and the Bank of Japan. If the Fed takes a tough approach, then the Bank of Japan continues to stick to extra loose monetary policy.

As BoJ Deputy Governor Masayoshi Amamiya said last Friday, the Bank of Japan will maintain an easing monetary policy to support the economy, and as part of a discussion held in Basel on June 26, the head of the Bank of Japan, Haruhiko Kuroda, noted that "unlike other economies, the Japanese economy has not been hit hard by the global inflationary trend, so monetary policy will continue to be accommodative."

In the middle of this month, USD/JPY broke a multi-year high and 135.19, reached in January 2002, and today the pair continues to develop an upward momentum.

Some economists believe that the trend could reverse or a significant correction if there is evidence of a sharp economic slowdown in the US, which could force the Fed to moderate its policy hawkishness or even stop raising interest rates further.

In the meantime, "the economy is strong," Williams said yesterday, and the Fed "needs to raise rates quite a bit this year and next."

Today, market participants will follow the speeches of Fed Chairman Jerome Powell, ECB President Christine Lagarde, and Bank of England Governor Andrew Bailey at the annual ECB forum on central banking, as well as the publication of important macro data from the US, including the price index for personal consumption expenditures (PCE) for the 1st quarter and final release of annual US GDP, also for the 1st quarter of 2022.

Strong PCE figures are expected and a decline in US GDP by -1.5% (the 1st estimate was -1.4%, the second -1.5%, and the previous values of the indicator were +6.9%, +2.3%, + 6.7%, +6.3% in Q1 2021). The level of impact of GDP data on the markets is high, but the final release has less impact, especially if it coincides with the forecast. The pre-release is the earliest and has the greatest impact on the market.