USD/JPY flirts with YTD peak, bulls now await sustained move beyond 142.00 mark

• USD/JPY touches a fresh YTD peak on Monday, albeit struggles to capitalize on the move.
• The Fed-BoJ policy divergence continues to act as a tailwind and favours bullish traders.
• A softer risk tone lends some support to the safe-haven JPY and caps any further gains.

The USD/JPY pair reverses an intraday dip to the 141.45 area and steadily climbs back closer to its highest level since November 2022 touched earlier this Monday. Spot prices trade just below the 142.00 mark during the early European session and seem poised to prolong the recent well-established bullish trajectory witnessed over the past three months or so.

The Japanese (JPY) continues to be weighed down by a big divergence in the monetary policy stance adopted by the Bank of Japan (BoJ) and other major central banks, including the US Federal Reserve (Fed). This, along with a modest US Dollar (USD) strength, acts as a tailwind for the USD/JPY pair on the first day of a new week, though slightly overstretched conditions hold back bulls from placing fresh bets and capping the upside.

It is worth recalling that the BoJ on Friday held its short-term interest rate target at -0.1% and made no changes to its yield curve control policy. The BoJ also kept intact its view that inflation will slow later this year, underscoring its focus on supporting a fragile economic recovery on the back of global uncertainty. In contrast, the US central bank, albeit decided to leave its interest rates unchanged, signalled that borrowing costs may still need to rise by as much as 50 bps by the end of this year. This, in turn, is seen lending some support to the Greenback and the USD/JPY pair.

That said, the incoming softer US macro data raised questions over how much headroom the US central bank has to keep raising rates and fueled speculations that the Fed is nearing the end of its policy tightening cycle. This, along with worries about a global economic downturn and a softer risk tone, lends some support to the safe-haven JPY. Apart from this, thin trading volumes on the back of a US bank holiday warrant some caution before placing aggressive bullish bets ahead of Fed Chair Jerome Powell's two-day congressional testimony on Wednesday and Thursday.

Investors will closely scrutinize Powell's remarks for clues about the future rate-hike path, which will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the USD/JPY pair. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for spot prices is to the upside. Hence, any corrective decline is more likely to attract fresh buyers and remain limited.

Technical levels to watch