USD/JPY Analysis: Bullish flag breakout in play, fresh multi-month tops and counting

The USD/JPY pair added to its weekly gains and edged higher for the third consecutive session on Friday. The momentum pushed the pair to the highest level since June 2020 during the first half of the European session. A generally positive mood around the equity markets undermined demand for the safe-haven Japanese yen and was seen as a key factor driving the pair higher. Bulls further took cues from a goodish pickup in the US Treasury bond yields and seemed rather unaffected by a subdued US dollar price action.

The USD was seen consolidating its recent strong gains to four-month tops, bolstered by the upbeat outlook for the US economy. Investors remained hopeful about the prospects for a relatively faster US economic recovery amid the impressive pace of coronavirus vaccinations and the passage of a massive stimulus package. The optimism was reinforced by Thursday's stronger US macro data, which showed that Initial Weekly Jobless Claims fell to a one-year low of 684K from the 781,000 reported in the previous week.

Adding to this, US President Joe Biden – in his first formal news conference on Thursday – made an ambitious pledge of administering 200 million vaccine shots in 100 days. This comes after the previous goal of 100 million shots was reached well ahead of the schedule, in 42 days and further boosted investors' confidence. That said, worries about the third wave of COVID-19 infections in Europe might cap gains for the major. Investors seem concerned that pandemic-related lockdowns could derail global economic recovery.

Market participants now look forward to the US economic docket, featuring the releases of Personal Income/Spending figures, Core PCE Price Index and revised Michigan Consumer Sentiment index. The data could provide further hints about the US economic strength, which, along with the US bond yields, might influence the USD. Traders might further take cues from the broader market risk sentiment to grab some short-term opportunities on the last day of the week.

Technical outlook

From a technical perspective, the pair on Thursday confirmed a fresh bullish breakout through a flag chart pattern and seems poised to prolong the recent strong upward trajectory. However, RSI (14) on the daily chart is still holding in the overbought territory and warrants some caution before positioning for any further appreciating move.

In the meantime, immediate resistance is pegged near May 2020 swing highs, around the 109.80-85 region. This is closely followed by the key 110.00 psychological mark. Some follow-through buying should pave the way for a move towards the next relevant hurdle near the 110.75-80 supply zone.

On the flip side, the descending channel resistance breakpoint, currently near the 109.00 mark now seems to protect the immediate downside. Any subsequent slide might be seen as a buying opportunity near the 108.60-55 region, which should now act as a strong near-term base for the major.