USD/JPY sits near 24-year peak, just below mid-140.00s ahead of US NFP report

• USD/JPY hits a 24-year high on Friday and now seems to have entered a consolidation phase.
• The Fed-BoJ policy divergence offsets modest USD weakness and continues to lend support.
• A modest USD weakness seems to cap the upside ahead of the crucial US jobs report (NFP).

The USD/JPY pair attracts some dip-buying near the 139.85 region and climbs to a fresh 24-year high on Friday. The pair now seems to have entered a bullish consolidation phase and is seen oscillating in a narrow band, just mid-140.00s through the first half of the European session.

The Japanese yen continues to be weighed down by the divergent stance adopted by the Bank of Japan and other major central banks, including the Federal Reserve. This, in turn, is seen as a key factor acting as a tailwind for the USD/JPY pair. It is worth mentioning that the BoJ has repeatedly said that it remains committed to the ultra-loose monetary policy. In contrast, the Fed is expected to tighten its policy further to tame inflation.

In fact, the markets are currently pricing in a greater chance of a supersized 75 bps rate hike at the September FOMC meeting. The bets were reaffirmed by the recent hawkish remarks by several Fed officials, which helped push the rate-sensitive 2-year US government bond to a 15-year peak. Moreover, the yield on the benchmark 10-year US government rose to more than a two-month peak, widening the US-Japan rate differential and weighing heavily on the JPY.

That said, hints at a possible government intervention to prop up the yen seem to hold back bulls from placing fresh bets. In fact, Hirokazu Matsuno, Japanese Chief Cabinet Secretary, told reporters that currency market volatility is heightening recently and sudden exchange-rate fluctuations are not desirable. Adding to this, a modest US dollar pullback from a two-decade high further contributes to keeping a lid on any further gains for the USD/JPY pair, at least for now.

Investors also seem reluctant and prefer to move to the sidelines ahead of the US monthly jobs data, due later during the early North American session. The popularly known NFP report will provide a fresh insight into the labour market conditions in the wake of rising interest rates and stubbornly high inflation. This, in turn, might influence Fed rate hike expectations and drive the USD demand. Nevertheless, the fundamental backdrop suggests that the path of least resistance for the USD/JPY pair is to the upside and any pullback might be seen as a buying opportunity.

Technical levels to watch