USD/JPY sticks to modest gains around 143.00 mark amid sustained USD buying

The USD/JPY pair attracts some dip-buying near the 141.75 area on Friday and builds on the overnight rebound from over a two-week low. Spot prices refresh daily high during the first half of the European session, albeit quickly retreat to the 143.00 mark in the last hour.

The overnight knee-jerk reaction to the intervention of Japanese authorities to stem the rapid fall in the Japanese yen turned out to be short-lived amid a strong bullish sentiment surrounding the US dollar. In fact, the USD Index, which measures the greenback's performance against a basket of currencies, hits a fresh 20-year peak and continues to draw support from rising bets for more aggressive Fed rate hikes. This turns out to be a key factor that provides a modest lift to the USD/JPY pair.

It is worth recalling that the Fed struck a more hawkish tone on Wednesday and signalled that it will undertake more aggressive rate increases to curb stubbornly high inflation. This remains supportive of elevated US Treasury bond yields and continues to act as a tailwind for the greenback. The yield on the rate-sensitive two-year US government bond touched a fresh 15-year high and the benchmark 10-year Treasury note jumped to its highest level since 2011 on Thursday.

The Bank of Japan (BoJ), on the other hand, aggressively defended its yield curve ceiling and reaffirmed its commitment to ultra-low interest rates on Thursday. This results in the widening of the US-Japan rate differential, which is weighing on the Japanese yen and offering additional support to the USD/JPY pair. That said, the prevalent risk-off environment helps limit losses for the safe-haven JPY and caps the upside for the major, at least for the time being.

That said, the Fed-BoJ policy divergence, which has been a key factor behind the yen's slump of over 25% against the USD since the beginning of 2022, suggests that the path of least resistance for the USD/JPY pair is to the upside. Market participants now look forward to the US PMI prints for some impetus ahead of Fed Chair Jerome Powell's speech. Traders will further take cues from the US bond yields and the broader risk sentiment to grab short-term opportunities.

Technical levels to watch