USD/JPY holds steady near daily high, around mid-134.00s amid renewed USD buying

• USD/JPY attracted some buying on Thursday and was supported by modest USD strength.
• The Fed-BoJ policy divergence provided an additional lift, though the upside seems limited.
• The risk-off impulse, retreating US bond yields might hold back bulls from placing fresh bets.

The USD/JPY pair regained positive traction on Thursday and reversed a part of the overnight corrective pullback from a 24-year peak. The pair maintained its bid tone through the early European session and was last seen trading near the top end of its daily range, just below mid-134.00s.

As investors digest the FOMC policy decision, the emergence of some dip-buying around the US dollar turned out to be a key factor that extended some support to the USD/JPY pair. Apart from this, a big divergence in the monetary policy stance adopted by the Federal Reserve and the Bank of Japan acted as a tailwind for spot prices.

As was expected, the Fed on Wednesday raised interest rates by 75 bps - the biggest hike since 1994 - and also indicated a faster policy tightening path to bring price pressures under control. The so-called dot plot showed that the median year-end projection for the federal funds rate moved up to 3.4% from 1.9% in the March estimate.

On the other hand, the BoJ has repeatedly said that 
it will stick to its ultra-loose policy settings until core inflation in Japan can stabilize near the 2% level. This, in turn, supports prospects for a further appreciating move for the USD/JPY pair, though a combination of factors might hold back bulls from placing aggressive bets.

In the post-meeting press conference, Fed Chair Jerome Powell said that he does not expect hikes of 75 bps to be common. Investors further took comfort from the view that the rate is forecast to decline to 2.5% over the long run. The outlook led to a further pullback in the US Treasury bond yields, which might cap gains for the USD/JPY pair.

Meanwhile, the Fed projected a slowing economy and rising unemployment in the months to come. Apart from this, concerns about the global supply chain disruptions caused by the Russia-Ukraine war and the latest COVID-19 outbreak in China took its toll on the global risk sentiment, which extended some support to the safe-haven JPY.

Traders also seemed reluctant and might prefer to wait for the BoJ monetary policy meeting on Friday, warranting some caution before positioning for any further gains. In the meantime, the US macro data - Philly Fed Manufacturing Index and the usual Weekly Initial Jobless Claims - should provide some impetus to the USD/JPY pair.

Technical levels to watch