USD/JPY sticks to BoJ-inspired strong intraday gains, around mid-134.00s

• USD/JPY gained strong positive traction on Friday after the BoJ’s monetary policy update.
• The US-Japan rate differential, the risk-on impulse weighed heavily on the safe-haven JPY.
• The emergence of fresh USD buying provided an additional boost and remained supportive.

The USD/JPY pair caught aggressive bids on Friday and snapped a two-day losing streak to a nearly two-week low, also stalling this week's retracement slide from a 24-year high. The pair held on to its strong intraday gains through the early part of the European session and was last seen just a few pips below mid-134.00s.

The Japanese yen weakened across the board after the Bank of Japan decided to leave its ultra-lose policy settings unchanged and reiterated its guidance to keep borrowing costs at "present or lower" levels. The Japanese central bank also pledged to guide the 10-year government bond yield to around 0%, which resulted in a further widening of the Japan-US interest rate differential and acted as a tailwind for the USD/JPY pair.

It is worth recalling that Federal Reserve on Wednesday raised interest rates by 75 bps - the biggest hike since 1994 - and indicated a faster policy tightening path to bring price pressures under control. Moreover, 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 and 3.8% in 2023. This, in turn, helped revive the US dollar demand.

Apart from this, a goodish recovery in the equity markets undermined the JPY and was seen as another factor that contributed to the USD/JPY pair's strong intraday rally of nearly 250 pips. That said, the ongoing fall in the US Treasury bond yields might cap gains for the USD. Investors took comfort from the Fed's view that the rate could decline to 3.4% in 2024 and 2.5% over the long run, which, in turn,  dragged the US bond yields lower.

Nevertheless, the USD/JPY pair has now climbed back to the overnight swing high and some follow-through buying would set the stage for a move back towards reclaiming the 135.00 psychological mark. Market participants now look forward to the US economic docket, featuring Industrial Production and Capacity Utilization Rate. Apart from this, the US bond yields, the USD price dynamics and the market risk sentiment might provide some impetus to the USD/JPY pair.

Technical levels to watch