USD/JPY climbs to fresh multi-week high, further beyond mid-115.00s

• USD/JPY climbed to a nearly three-week high and was supported by a combination of factors.
• The widening of US-Japanese yield spread, the risk-on impulse weighed on the safe-haven JPY.
• The stage seems all set for an extension of the week-long strong rally from a two-month low.

The USD/JPY pair edged higher through the early European session and climbed beyond mid-115.00s or a nearly three-week high in the last hour.

A combination of factors assisted the USD/JPY pair to attract some dip-buying near the 115.20 area on Friday and turn positive for the third successive day. This also marked the fourth day of a positive move in the previous five, with bulls now looking to build on this week's strong rally from over a two-month low, around the 113.45 region touched on Monday.

A goodish recovery in the global risk sentiment – as depicted by a generally positive tone across the equity markets – undermined the safe-haven Japanese yen. Apart from this, the divergence in the Fed-Bank of Japan monetary policy outlooks further drove flows away from the JPY and continued pushing the USD/JPY pair higher on the last day of the week.

The Fed on Wednesday indicated that it could raise interest rates at a faster pace than anticipated to contain stubbornly high inflation. The market was quick to start pricing in the possibility of five quarter-point rate hikes by the end of 2022. Moreover, short-term interest rate futures imply a 20% risk that the first hike in March could be 50 basis points.

Conversely, the Bank of Japan reaffirmed to continue with their persistent and powerful monetary easing until further notice. This, in turn, has resulted in a further widening of the 2-year US-Japanese government bond yield differential to its highest since late February 2020, which was seen as another factor that provided a boost to the USD/JPY pair.

Friday's follow-through move up could further be attributed to some technical buying following the overnight sustained strength back above the key 115.00 psychological mark. The subsequent price action favours bullish traders and supports prospects for an extension of the recent appreciating move, possibly back towards reclaiming the 116.00 round figure.

Investors now look forward to the US macro data – the Core Personal Consumption Expenditure Price Index and revised Michigan Consumer Sentiment Index for January. This, along with the US bond yields, will influence the USD. Traders will also take cues from the broader market risk sentiment for some short-term opportunities around the USD/JPY pair.

Technical levels to watch