USD/JPY consolidates recent gains to the highest level since May 2002, around mid-126.00s

• USD/JPY oscillated in a range just below the two-decade high touched earlier this Monday.
• BoJ Governor Kuroda’s remarks, the risk-off mood benefitted the JPY and capped the upside.
• Sustained USD buying, the Fed-BoJ policy divergence continued lending support to the pair.

The USD/JPY pair consolidated its recent strong gains to a nearly two-decade high and remained confined in a narrow trading band through the early North American session. the pair was last seen trading around the mid-126.00s, nearly unchanged for the day.

A combination of diverging forces failed to provide any meaningful impetus to the USD/JPY pair and led to subdued/range-bound price move on the first day of a new week. Bank Of Japan Governor Haruhiko Kuroda said that sharp moves in the Japanese yen could have negative impacts on the domestic economy. This, along with a generally weaker tone around the equity markets, benefitted the safe-haven JPY and acted as a headwind for spot prices.

The downside, however, remains cushioned amid a big divergence in the monetary policy stance adopted by the BoJ and the Fed. The markets seem convinced that the US central bank would adopt a more aggressive policy response and hike interest rates at a faster pace to curb soaring inflation. This was reinforced by an extended sell-off in the US fixed-income market, which pushed the US Treasury bond yields to a fresh multi-year peak.

On the other hand, the BoJ has repeatedly said that it remains ready to use powerful tools to avoid long-term interest rates from rising too much. In fact, the Japanese central bank last month offered to buy unlimited 10-year Japanese government bonds to defend the 0.25% yield cap. This has resulted in the widening of the US-Japanese government bond yield differential, supporting prospects for a further appreciating move for the USD/JPY pair.

That said, relatively thin liquidity on the back of a holiday in the European markets held back bullish traders from placing fresh bets. Apart from this, extremely overbought conditions on short-term charts contribute to keeping a lid on any meaningful upside for the USD/JPY pair amid absent relevant market moving economic releases.

Technical levels to watch