USD/JPY continues to set higher highs ahead of US PCE Price Index

The USD/JPY pair rallies around 140 pips from the 134.00 neighbourhood on Friday and climbs above the two-month high touched the previous day. The pair currently trades above the 135.00 psychological mark and seems poised to build on the positive momentum.

The Japanese Yen (JPY) did get a minor boost on the last day of the week after data released earlier today showed that Japan's core consumer inflation hit a new 41-year high in January. The initial reaction, however, fades rather quickly in reaction to the incoming Bank of Japan (BoJ) Governor Kazuo Ueda's dovish remarks. Addressing the parliament for the first time since his nomination, Ueda said that the recent rise in consumer inflation was driven mostly by surging import costs of raw materials, rather than strong domestic demand.

Ueda added that the BoJ's current ultra-loose monetary policy stance is a necessary and appropriate means to steadily meet the 2% target. In contrast, the Federal Reserve is expected to stick to its hawkish stance. In fact, the FOMC minutes released on Wednesday showed that officials were determined to raise interest rates further to fully gain control over inflation. This remains supportive of elevated US Treasury bond yields, which, in turn, keeps the US Dollar pinned near a multi-week high and further lends support to the USD/JPY pair.

The aforementioned fundamental backdrop supports prospects for a further near-term appreciating move. The technical picture remains biased towards bullish bets as the pair continues to inch higher, setting higher highs with each day, and continuing the uptrend that began at the start of the year. Momentum indicators such as the RSI , moreover, are still supportive of further gains as they still remain out of the overbought zone. 

The USD bulls, however, might refrain from placing aggressive bets and wait for the release of the US Core PCE Price Index - the Fed's preferred inflation gauge. The data should influence expectations above the Fed's future rate-hike path and drive the USD demand, providing some impetus to the USD/JPY pair. Nevertheless, spot prices remain on track to register gains for the second straight week and the fourth week in the previous five.

Technical levels to watch