USD/JPY remains confined in a range below mid-128.00s, downside seems cushioned

• USD/JPY struggled to gain traction and oscillated in a range on the last day of the week.
• A combination of factors benefitted the safe-haven JPY and capped any meaningful gains.
• Aggressive Fed rate hike bets pushed the USD to a two-year peak and extended support.

The USD/JPY pair seesawed between tepid gains/minor losses through the mid-European session and now seems to have stabilized just below mid-128.00s.

A combination of diverging forces failed to provide any meaningful impetus to the USD/JPY pair and led to subdued/range-bound price action on the last day of the week. Investors now seem worried that Japan would intervene to support its currency, along with a weaker risk tone, underpinned the safe-haven Japanese yen. This, in turn, acted as a headwind for spot prices, though rising US Treasury bond yields lifted the US dollar to a fresh two-year high and offered some support.

Fed chair Jerome Powell on Thursday all but confirmed a 50 bps rate hike at the upcoming policy meeting on May 3-4 and also hinted at consecutive increases this year. The markets were quick to price in three jumbo rate hikes this year, which, in turn, pushed the yield on the rate-sensitive 5-year US government bond above 3% for the first time since 2018. Moreover, the 10-year real yields turned positive for the first time in two years and continued underpinning the greenback.

In contrast, the Bank of Japan on Wednesday offered to buy unlimited amounts of Japanese government bonds to defend the 0.25% yield cap for the third time since February. Moreover, the BoJ has repeatedly said that it remains ready to use powerful tools to avoid long-term interest rates from rising too much and sustain the current powerful monetary easing to support economic recovery. The resultant Fed-BoJ policy divergence further extended support to the USD/JPY pair.

The fundamental backdrop favours bullish traders and supports prospects for an extension of the strong appreciating move. That said, extremely overbought conditions on daily/weekly/monthly charts warrant some caution. Next on tap will be the release of the flash US PMI prints. This, along with the US bond yields, the US bond yields and the market risk sentiment will influence the USD/JPY pair.

Technical levels to watch