USD/JPY sticks to dovish BoJ-inspired gains, remains below YTD peak touched on Thursday

• USD/JPY catches fresh bids on Friday in reaction to the BoJ’s dovish stance.
• An uptick in the US bond yields revives the USD demand and lends support.
• The Fed-BoJ policy divergence supports prospects for further intraday gains.

The USD/'JPY pair attracts fresh buyers after the Bank of Japan (BoJ) announced its policy decision earlier this Friday and stalls the overnight retracement slide from the 141.50 region, or its highest level since November 2022. The pair maintains its bid tone heading into the European session and current trades near the top end of its daily range, around the 140.65-140.70 area.

The Japanese Yen (JPY) weakens across the board in reaction to the BoJ's decision to maintain its ultra-loose monetary policy stance to support fragile economic growth. The Japanese central bank held its short-term interest rate target at -0.1%, as expected, and made no changes to its yield curve control policy after a two-day meeting. The BoJ also kept intact its view that inflation will slow later this year, suggesting that it will remain a dovish outlier amid global uncertainty. This, along with a modest US Dollar (USD) strength, assists the USD/JPY pair to regain some positive traction on the last day of the week.

Having registered heavy losses over the past three days, the USD Index (DXY), which tracks the Greenback against a basket of currencies, stages a modest bounce from over a five-week low and draws support from an uptick in the US Treasury bond yields. That said, any meaningful USD rally seems limited in the wake of expectations that the Federal Reserve (Fed) is getting closer to the peak of its policy tightening cycle. Thursday's rather unimpressive US macro data - namely Industrial Production, Weekly Jobless Claims and Retail Sales - raised questions over the prospects for additional rate hikes by the Fed.

The US central bank, meanwhile, indicated earlier this week that borrowing costs may still need to rise by as much as 50 bps by the end of this year. This marks a big divergence in comparison to the BoJ's dovish outlook, which might continue to undermine the JPY. Apart from this, diminishing odds for an intervention by the Japanese government to stabilize the domestic currency suggests that the path of least resistance for the USD/JPY pair is to the upside. Hence, any intraday dip might still be seen as a buying opportunity and remain cushioned in the absence of any relevant market-moving data from the US.

Technical levels to watch