USD/JPY Outlook: Eyes another breakout through 130.00 post-BoJ, focus shifts to US GDP

• USD/JPY surged to a fresh two-decade high after BoJ reaffirmed its ultra-dovish stance
• The Japanese central bank also doubled down on its defence of yield curve control.
• Aggressive Fed rate hike bets continued boosting the USD and remained supportive.

The USD/JPY pair built on the previous day's goodish bounce from sub-127.00 levels and gained strong positive traction for the second successive day on Thursday. The buying interest picked up pace during the Asian session after the Bank of Japan announced its policy decision and vowed to keep its existing ultra-loose policy settings. The Japanese yen tumbled across the board after the central bank promised to conduct unlimited bond purchase operations to defend its “near zero” target for 10-year yields. In contrast, the Fed remains on track to tighten its monetary policy at a faster pace to curb soaring inflation. The resultant policy divergence, along with an extension of the blowout US dollar rally, lifted the pair to a fresh two-decade high, around the 130.00 psychological mark.

In fact, the US central bank is expected to hike interest rates by 50 bps when it meets on May 3-4, and again in June and July, and ultimately lift rates to around 3.0% by the end of the year. The bets were reaffirmed by the recent hawkish comments by influential FOMC members, including Fed Chair Jerome Powell last week. This, along with the deteriorating global economic outlook, boosted the greenback's reserve currency status. Investors now seem worried that Russia could cut off supplies to Europe and impact the region's economic growth. Moreover, prolonged COVID-19 lockdowns in China to curb the latest outbreak further fueled fears about stalling global growth. The combination of factors pushed the buck to a more than two-year peak, which provided an additional lift to the major.

It, however, remains to be seen if bulls are able to capitalize on the move or opt to take profits off the table. Nevertheless, the fundamental backdrop seems tilted firmly in favour of bullish traders, though overbought conditions warrant caution amid speculations that the recent freefall in the JPY could trigger verbal intervention. Market participants now look forward to the US economic docket, highlighting the release of the Advance Q1 GDP report and the usual Weekly Initial Jobless Claims. The data, along with Fed rate hike expectations, would drive the USD demand and provide a fresh impetus to the major. Traders will further take cues from fresh developments surrounding the Russia-Ukraine saga to grab some short-term opportunities around the pair.

Technical outlook

From current levels, any subsequent move up is likely to pause near the 130.35 region. That said, some follow-through buying will set the stage for an extension of the parabolic rise towards the 130.70 region en-route the 131.00 round figure. On the flip side, the previous YTD high, around the 129.40 region now seems to protect the immediate downside ahead of the 129.00 mark. The next relevant support is pegged near the 128.40-128.35 region. A convincing break below might trigger some long-unwinding trade and drag spot prices below the 128.00 mark, towards testing the 127.50 support zone area. The pair could eventually drop back to the 127.00 mark, which should act as a strong near-term base and a key pivotal point for short-term traders.