- USD/JPY soared to a new two-decade high on Monday, though it struggled to capitalize on the move.
- The risk-off mood underpinned the JPY as a safe haven and capped the pair amid a modest USD pullback.
- The policy divergence between the Fed and the BoJ favors bullish traders and supports prospects for additional gains.
The pair USD/JPY it trimmed a significant part of its intraday gains and fell to the lower end of its daily trading range, around the 130.75-130.70 area during the early American session.
The pair struggled to capitalize on its early positive move and witnessed a modest pullback from the 131.35 area, or the highest level since April 2002 reached on Monday. The prevailing sentiment of risk aversion, represented by a weaker tone in equity markets, underpinned the Japanese yen as a safe haven. On the other hand, the US dollar pulled back a bit from a two-decade high, which was seen as another factor putting some pressure on the USD/JPY pair. However, the downside remains cushioned amid a wide divergence in the monetary policy stance adopted by the Bank of Japan and the Fed.
The Japanese central bank has pledged to maintain its existing ultra-loose policy setting and promised unlimited bond-buying operations to defend its “near-zero” target for 10-year yields. By contrast, Fed Chairman Jerome Powell said last week that policymakers were ready to approve a 50bp hike at upcoming meetings. In addition, markets are pricing in a further 200bp rate hike by the Federal Reserve for the remainder of 2022. This, coupled with concerns about rapidly rising consumer prices, pushed government bond yields from US 10-year benchmark to its highest level in more than a decade.
So the focus now shifts to the release of the latest US consumer inflation figures on Wednesday. However, the fundamental backdrop remains firmly tilted in favor of the USD bulls and supports the prospects for some buying around the USD/JPY pair. That said, mildly overbought conditions make it prudent to wait for a near-term consolidation before positioning for any further appreciation moves amid the absence of any relevant economic releases in the US market.
Technical levels
Source: Fx Street
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