USD/JPY holds steady near 128.00 mark, focus shifts to BoJ decision on Thursday

• A combination of factors assisted USD/JPY to regain positive traction on Wednesday.
• The risk-off impulse undermined the safe-haven JPY and extended support to the pair.
• The Fed-BoJ policy divergence favours bullish traders amid broad-based USD strength.

The USD/JPY pair maintained its bid tone through the mid-European session and was last seen hovering near the daily high, just above the 128.00 round figure.

Having shown some resilience below the 127.00 mark, the USD/JPY pair staged a goodish rebound from the one-week low touched earlier this Wednesday and was supported by a combination of factors. A goodish recovery in the global risk sentiment - as depicted by a solid bounce in the equity markets - undermined the safe-haven Japanese yen. This, along with sustained US dollar buying and the Fed-BoJ monetary policy divergence, offered additional support to spot prices.

The USD rallied to its highest level since March 2020 amid expectations that the Fed will tighten its monetary policy at a faster pace to curb soaring inflation. In fact, the markets now expect the US central bank to raise interest rates by 50 bps when it meets on May 3-4, and again in June, July and September. Apart from this, rising geopolitical tensions and the deteriorating global economic outlook further boosted the greenback's status as the reserve currency.

Russia announced plans to halt gas flows to Poland and Bulgaria from Wednesday amid a standoff over fuel payments from “unfriendly” buyers in rubles. The development raised concerns that Russia would cut off supplies to Europe and impact the region's economic growth. Moreover, strict COVID-19 lockdowns in China is expected to take its toll on the world's second-largest economy, which provided an additional incentive for traders to hold the greenback.

In contrast to the Fed, the BoJ again offered to buy unlimited amounts of Japanese government bonds on Tuesday to defend the 0.25% yield cap. Moreover, Japanese Prime Minister Fumio Kishida urged BoJ to maintain its ultra-loose monetary policy, dismissing the idea of using interest rate hikes to prevent further declines in the domestic currency. The fundamental backdrop favours bulls, though traders seemed reluctant ahead of key event/data risks on Thursday.

The BoJ will announce its monetary policy decision on Thursday and investors will be waiting to see if the central bank makes any changes to its yield curve control policy. Apart from this, the focus will be on the Advance US Q1 GDP report, which might influence Fed rate hike expectations. The combination of factors should provide a fresh impetus to the USD/JPY pair and assist investors to determine the next leg of a directional move.

Technical levels to watch