USD/JPY Analysis: Bulls turn cautious near 137.00, fresh 24-year high amid recession fears

The USD/JPY pair scaled higher for the fourth successive day on Wednesday and shot to its highest level since September 1998, around the 137.00 mark in reaction to Fed Chair Jerome Powell's hawkish outlook. Speaking at the ECB Forum in Sintra, Powell said that the US economy is in strong shape and is well-positioned to handle tighter policy. He further added that the Fed remains focused on getting inflation under control and the market pricing is pretty close to the dot plot. This reaffirmed market bets for a faster policy tightening by the US central bank, which provided a strong boost to the US dollar. Powell's remarks reinforced the divergent policy stance adopted by the Fed and the Bank of Japan. This, in turn, weighed on the Japanese yen and further acted as a tailwind for the major.

That said, a combination of factors held back bulls from placing aggressive bets and kept a lid on the USD/JPY pair. Investors remained concerned that rapidly rising interest rates and tighter financial conditions would pose challenges to global economic growth. This was evident from a weaker tone around the equity markets, which underpinned demand for the safe-haven JPY. Furthermore, the anti-risk flow dragged the US Treasury bond yields lower and resulted in the narrowing of the US-Japan rate differential. This was seen as another factor that offered some support to the JPY and attracted some selling around the major during the Asian session on Thursday. That said, any meaningful corrective slide still seems elusive, warranting caution for aggressive bearish traders.

Market participants now look forward to the US economic docket - featuring the Core PCE Price Index (Fed's preferred inflation gauge) and the usual Weekly Initial Jobless Claims. This, along with the US bond yields, will drive the USD price dynamics and provide some impetus to the USD/JPY pair. Traders will further take cues from the broader market risk sentiment to grab short-term opportunities around the major.

Technical outlook

From a technical perspective, the overnight move beyond the previous YTD peak, around the 136.70 area, could be seen as a fresh trigger for bullish traders. That said, failure near the 137.00 mark and the subsequent pullback warrant some caution. This makes it prudent to wait for sustained strength beyond the said handle before positioning for any further gains. The USD/JPY pair might then aim to reclaim the 138.00 mark and accelerate the momentum towards challenging a multi-week ascending trend-line resistance, currently around the 138.35 region.

On the flip side, a convincing break below a two-week-old ascending trend-line support might prompt some long-unwinding and make the USD/JPY pair vulnerable to weaken further below the 136.00 mark. The corrective decline could get extended towards the 135.50-135.45 horizontal support, which should act as a strong base for spot prices. Some follow-through selling would suggest that the pair has formed a near-term top and pave the way for a fall towards the 135.00 psychological mark en-route the 134.40-134.35 congestion zone.