Fed Hike Fears Fuel USD/JPY Surge as Oil Prices Soar

The USD/JPY currency pair is rising as US Treasury yields climb above 5% for the first time since 2007, driven by increased expectations of a Federal Reserve rate hike on Wednesday. The market is pricing in a 92% probability of a 25-basis-point rate hike, taking rates to 3.75-4%, up from 85% yesterday.

The yen has pulled back as markets look ahead to the Bank of Japan's rate decision on Friday, where the central bank is expected to raise rates by 25 basis points. The focus will be on how strongly it signals further tightening.

Meanwhile, the DAX index slumped due to rising oil prices, elevated bond yields, and caution ahead of major central bank meetings this week. Oil prices surged as Houthi attacks on Saudi Arabia increased concerns over supply disruptions in the Middle East.

The 10-year US Treasury yield has risen to its highest level since 2007, while the German Bund yield reached a 15-year high, deepening the global bond sell-off. Higher yields can feed through to mortgages, corporate loans, and other forms of credit, potentially slowing economic growth.