USD/JPY stands tall near two-decade peak, just below 133.00 mark amid stronger USD

• USD/JPY gained traction for the third successive day and shot to a fresh two-decade high.
• The recent widening of the US-Japanese yield differential remained supportive of the move.
• A softer risk tone underpinned the safe-haven JPY and capped amid overbought conditions.

The USD/JPY pair stood tall near a two-decade high heading into the North American session and was last seen trading around the 132.80-132.85 region, up nearly 1.0% for the day.

The recent widening of the US-Japanese government bond yield differential assisted the USD/JPY pair to build on last week's strong positive move and gain traction for the third successive day on Tuesday. It is worth recalling that the Bank of Japan has promised to conduct unlimited bond purchase operations to defend its near-zero target for 10-year yields.

In contrast, the yield on the benchmark 10-year US government bond held steady above 3.0% amid concerns that global supply chain disruption caused by the Russia-Ukraine war would push consumer prices even higher. This might force the US central bank to tighten its monetary policy at a faster pace, which, in turn, acted as a tailwind for the US bond yields.

Meanwhile, elevated US Treasury bond yields underpinned the US dollar, which was seen as another factor that provided an additional lift to the USD/JPY pair. That said, a softer risk tone offered support to the safe-haven Japanese yen and held back traders from placing fresh bullish bets around the pair amid extremely overbought conditions on short-term charts.

The market sentiment remains fragile amid expectations that a more aggressive move by major central banks to constrain inflation could pose challenges to global economic growth. Apart from this, traders also seemed reluctant and might now prefer to wait on the sidelines ahead of the latest US consumer inflation figures, scheduled for release on Friday.

The fundamental backdrop seems tilted firmly in favour of bullish traders, though it would be prudent to wait for some near-term consolidation or modest pullback before positioning for any further gains. In the absence of top-tier US economic data on Tuesday, the US bond yields, the USD price dynamics and the broader market risk sentiment continue to influence the USD/JPY pair.

Technical levels to watch