• A combination of factors pushed USD/JPY to a fresh 24-year high on Monday.
  • A dovish BoJ policy stance continued weighing heavily on the Japanese yen.
  • Relentless USD buying provided an additional lift and remained supportive.
  • The risk-off mood, sliding US bond yields held bulls from placing fresh bets.

The USD/JPY pair caught aggressive bids on the first day of a new week and surged to its highest level since September 1998, around the 137.75 region. Japan's ruling coalition scored a strong victory in Sunday's upper house election. The result suggested that the voting public remains behind the ultra-loose monetary policy adopted by the Bank of Japan. Adding to this, BoJ Governor Haruhiko Kuroda reiterated that the central bank remains ready to take additional monetary easing steps as necessary. This, in turn, was seen as a key factor that weighed heavily on the Japanese yen, which, along with the relentless US dollar buying, provided a goodish lift to the major.

In fact, the USD Index soared to a fresh two-decade high during the Asian session on Tuesday and continued drawing support from hawkish Fed expectations. The market seems convinced that the US central bank would stick to its faster policy tightening path to combat stubbornly high inflation. The bets were reaffirmed by the FOMC meeting minutes released last week, which indicated that another 50 or 75 bps rate hike is likely at the July meeting. Policymakers also emphasized the need to fight inflation even if it results in an economic slowdown. Apart from this, technical buying above the previous YTD peak, around the 137.00 mark, contributed to the USD/JPY pair's strong move up.

The prospects for a more aggressive move by major central banks to curb soaring inflation, along with the ongoing Russia-Ukraine war and a fresh COVID-19 outbreak in China, have been fueling recession fears. This, in turn, continued weighing on investors' sentiment, which was evident from a sea of red across the equity markets and underpinned traditional safe-haven assets. The flight to safety led to a sharp pullback in the US Treasury bond yields and resulted in the narrowing of the US-Japan rate differential. The combination of factors offered some support to the Japanese yen and held back bulls from placing fresh bets around the USD/JPY pair, at least for the time being.

Nevertheless, the Fed-BoJ policy divergence supports prospects for an extension of the recent bullish trajectory. Traders, however, might now prefer to wait for the latest US consumer inflation figures, due for release on Wednesday, before positioning for the next leg of a directional move. In the meantime, the US bond yields, the USD price dynamics and the broader market risk sentiment might provide some impetus to the USD/JPY pair amid absent relevant market-moving economic data.

Technical outlook

From a technical perspective, the overnight strong move up took along short-term trading stops placed near the 136.50-136.60 region. A subsequent move and acceptance above the 137.00 mark was seen as a fresh trigger for bullish traders. This, in turn, validates the near-term constructive outlook, though slightly overstretched oscillators warrant some caution. Nevertheless, the USD/JPY pair seems poised to surpass the 138.00 mark and aim to test the next relevant hurdle near the 138.35 region. The momentum could further get extended and lift spot prices to the 139.00 mark, representing an ascending trend-line resistance extending from early May.

On the flip side, the 137.00 round figure now seems to protect the immediate downside ahead of the 136.60-136.50 resistance breakpoint, now turned support. Any further pullback might still be seen as a buying opportunity and remain limited near the 136.00 mark. The latter should act as a strong base for the USD/JPY pair, which if broken decisively could trigger some long-unwinding trade. Spot prices could then accelerate the corrective fall towards the 135.00 psychological mark en-route the 134.80-134.75 horizontal support.


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