USD/JPY sticks to gains near its highest level since mid-December, just above 200-day SMA

• USD/JPY touches a fresh YTD peak on Wednesday amid sustained USD buying interest.
• Rising bets for a 50 bps Fed rate hike in March, elevated US bond yields boost the USD.
• The risk-off mood lends some support to the safe-haven JPY and caps gains for the pair.

The USD/JPY pair gains traction for the second straight day on Wednesday and climbs to its highest level since mid-December. The pair maintains its bid tone through the early European session and is currently placed around the 137.60 region, just above a technically significant 200-day Simple Moving Average (SMA).

The overnight hawkish remarks by Federal Reserve Chair Jerome Powell pushes the US Dollar to a three-month high, which, in turn, is seen acting as a tailwind for the USD/JPY pair. In the prepared remarks for his semi-annual congressional testimony, Powell indicated that interest rates might need to go up faster and higher than previously anticipated. Powell added that the Fed is prepared to increase the pace of rate hikes to combat stubbornly high inflation and warned against prematurely loosening policy.

This, in turn, lifts bets for a 50 bps rate hike at the March policy meeting and remains supportive of elevated US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond is holding steady near the 4.0% threshold and the rate-sensitive two-year Treasury note stands tall near its highest level since 2007. This continues to lend support to the Greenback, which, along with expectations that the Bank of Japan (BoJ) will maintain the ultra-loose policy settings, is pushing the USD/JPY pair higher.

It is worth recalling that the incoming BoJ Governor Kazuo Ueda last week stressed the need to maintain the ultra-loose policy to support the fragile economy.  Ueda also said that the central bank isn't seeking a quick move away from a decade of massive easing. This marks a big divergence in comparison to the Fed's hawkish stance and supports prospects for a further appreciating move for the USD/JPY pair. That said, the risk-off mood benefits the JPY's safe-haven status and keeps a lid on any further gains for the major.

Nevertheless, the fundamental backdrop seems tilted firmly in favour of bullish traders. Market participants now look forward to the US economic docket, featuring the release of the ADP report on private-sector employment and JOLTS Job Openings data. Apart from this, Powell's second day of testimony before the House Financial Services Committee should influence the USD price dynamics and provide some impetus to the USD/JPY pair. The focus will then shift to the BoJ meeting and the US NFP report on Friday.

Technical levels to watch