USD/JPY trades just below 142.00 mark, its highest level since November 2022

• USD/JPY touches a fresh YTD peak on Monday, albeit lacks follow-through buying.
• The Fed-BoJ policy divergence is seen as a key factor lending support to the major.
• A generally softer risk tone underpins the safe-haven JPY and caps further gains.

The USD/JPY pair enters a bullish consolidation phase on Monday and oscillates in a narrow band below the 142.00 mark, or its highest level since November 2022 touched during the Asian session.

The Japanese Yen (JPY) continues to be undermined by the Bank of Japan's (BoJ) decision on Friday to leave its ultra-loose policy settings to support the fragile domestic economy. In fact, the Japanese central bank held its short-term interest rate target at -0.1% and made no changes to its yield curve control policy. 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, in turn, is seen as a key factor acting as a tailwind for the USD/JPY pair on the first day of a new week.

The US Dollar (USD), on the other hand, edges higher for the second straight day and looks to build on Friday's modest bounce from over a one-month low amid the Federal Reserve's (Fed) hawkish outlook. It is worth recalling that the US central bank last week decided to pause its year-long rate-hiking cycle, though signalled that borrowing costs may still need to rise by as much as 50 bps by the end of this year. This, in turn, assists the Greenback to gain some follow-through traction and further lends support to the USD/JPY pair, though the uptick lacks bullish conviction.

The recent softer US macro data raised questions over how much headroom the Fed has to keep raising rates. Moreover, market participants seem confident that the Fed is almost done with its tightening, which is holding back the USD bulls from placing aggressive bets. Apart from this, a generally softer tone around the equity markets helps limit losses for the safe-haven JPY and further contributes to capping the upside for the USD/JPY pair, at least for now. Nevertheless, the fundamental backdrop suggests that the path of least resistance for spot prices is to the upside.

Hence, any meaningful corrective decline might still be seen as a buying opportunity and is more likely to remain cushioned. The market focus now shifts to Fed Chair Jerome Powell's two-day congressional testimony on Wednesday and Thursday, which will be closely scrutinized for fresh clues about the future rate-hike path. This, in turn, will play a key role in influencing the USD price dynamics and provide some meaningful impetus to the USD/JPY pair. Traders this week will also confront the release of the flash US PMI prints on Friday.

Technical levels to watch