USD/JPY Outlook: Seems poised to surpass YTD tops and reclaim 112.00 mark

• USD/JPY scaled higher for the fifth successive day and climbed to near three-month tops.
• Surging US bond yields continued acting as a tailwind for the USD and remained supportive.
• The technical set-up supports prospects an extension of the ongoing strong positive move.

The USD/JPY pair built on last week's solid rebound from the 109.10 support area and gained some follow-through traction on the first day of a new trading week. The widening of the nominal yield differential between the US and Japanese government bonds turned out to be a key factor that drove flows away from the Japanese yen. The US Treasury bond yields have been moving higher after the Fed hinted that it may soon taper its asset purchases and the dot plot showed policymakers' inclination to raise interest rates in 2022. In fact, the yield on the benchmark 10-year US government bond surpassed the 1.50% threshold for the first time since June 2021. Conversely, the 10-year Japanese government bond yields remained near zero due to the Bank of Japan's yield curve control policy.

Meanwhile, prospects for an early policy tightening by the Fed pushed the US dollar back closer to one-month tops and provided an additional boost to the major. The expectations were reinforced by comments from Fed Governor Lael Brainard, New York Fed President John Williams and Chicago Fed President Charles Evans. The officials expressed comfort with the first phase of policy tightening. Adding to this, Fed Chair Jerome Powell, in the prepared remarks to be delivered to the Senate Banking Committee on Tuesday, cautioned that the causes of the recent rise in inflation may last longer than anticipated. The central bank chair added that the economic growth continues to strengthen but has met with upward price pressures caused by supply chain bottlenecks and other factors.

On the economic data front, the US Durable Goods Orders increased 1.8% in August and surpassed expectations for a 0.7% rise by a big margin. Moreover, the previous month's reading was also revised higher to show a 0.5% growth as against a modest decline reported earlier. Additional details revealed that orders excluding transportation rose 0.2% vs. 0.5% expected. The only disappointment, however, was offset by stronger non-defence capital goods orders excluding aircraft – a closely watched proxy for business spending plans – and orders excluding defence equipment. Nevertheless, the pair settled near the top end of its daily trading range and gained traction for the fifth successive day, rising to the highest level since early July during the Asian session on Tuesday.

There isn't any major market-moving economic data due for release from the US. Hence, the market focus will remain glued to Fed Chair Jerome Powell's testimony later during the early North American session. Apart from this, the US bond yields will influence the USD price dynamics and provide some impetus to the major. Traders might further take cues from the broader market risk sentiment to grab some short-term opportunities around the pair.

Technical outlook

From a technical perspective, last week’s sustained move beyond the 110.25-30 supply zone was seen as a key trigger for bullish traders. A subsequent move beyond August monthly swing highs, around the 110.80 region, and the 111.00 mark reaffirmed the near-term bullish breakout. Meanwhile, technical indicators on the daily chart maintained their bullish bias and are still far from being in the overbought territory, supporting prospects for additional gains. Hence, some follow-through strength towards YTD tops, around the 111.65 region, remains a distinct possibility. Bulls might eventually aim to reclaim the 112.00 mark for the first time since February 2020.

On the flip side, the 111.00 mark, followed by the 110.80 region now seems to protect the immediate downside. Any further decline could be seen as a buying opportunity and remain limited near the 110.30-25 resistance breakpoint. Failure to defend the mentioned support levels, leading to a subsequent break below the key 110.00 psychological mark will negate the near-term positive bias. The pair might then accelerate the slide back towards challenging the 109.10 strong horizontal support.