USD/JPY leans bullish around 20-year high on upbeat options market signals, pre-Fed caution

• USD/JPY bulls take a breather after rising to the highest levels since 2002.
• Options market signals portray consecutive three weeks of bullish bias.
• Japan’s Matsuno shows readiness to act but sounds vague on FX market intervention.
• Hawkish Fed bets join China-linked headlines to propel prices.

USD/JPY remains on the front foot around a two-decade high, despite recent inaction around 135.00. That said, the quote’s recent consolidation could be linked to the comments from Japan’s Chief Cabinet Secretary Matsuno, as well as the market’s anxiety ahead of Wednesday’s US Federal Reserve (Fed) monetary policy meeting.

Japan’s Chief Cabinet Secretary Matsuno showed the capacity to take appropriate actions on FX market movements if necessary. “Japan's govt will respond appropriately to exchange rate following G7 agreement on currencies while keeping close communication with the US, other authorities,” adds the policymaker.

On the other hand, the CME FedWatch tool shows 26.8% chance of a 75 bp Federal Reserve rate hike at the June 15 meeting, which in turn suggests high hopes from the Fed. As a result, the US Dollar Index (DXY) dribbles around a one-month high.

Additionally supporting the USD/JPY bulls are the options market signals as the weekly risk reversal (RR), the spread between calls and puts, rose for the third consecutive week by the end of Friday, +0.220 at the latest. It should be noted, however, that the daily RR dropped for the second day in a line down -0.210 and test the pair buyers.

Looking forward, a light calendar on Monday may challenge USD/JPY bulls but the risk catalysts, like escalating covid woes from China and the recent Sino-American tussles over Taiwan can underpin the pair’s upside momentum.

Technical analysis

The USD/JPY pair’s ability to cross the three-day-old resistance, around 134.75-80, directs it towards the year 2002’s high surrounding 135.15-20. However, the pair’s upside past 135.20 appears difficult amid overbought RSI.

Meanwhile, the resistance-turned-support around 134.75-80 restricts the yen pair’s immediate downside ahead of an ascending support line from late May, around 133.85 by the press time.