USD/JPY rallies to near 142.00 as US Dollar jumps and BoJ policy seems unchanged

• USD/JPY jumps to near 142.00 as the US Dollar rallies amid a cautious market mood.
• Fed-BoJ policy divergence is expected to widen further as the BoJ is expected to continue its dovish stance.
• Japan’s inflation is accelerating more than expected but the key is whether the increase is sustainable.

The USD/JPY pair is swiftly marching towards the critical resistance of 142.00 in the European session. The asset has shifted into a bullish trajectory amid strength in the US Dollar Index (DXY) and rising odds of an unchanged interest rate decision by the Bank of Japan (BoJ), which will be announced on July 28.

S&P500 futures have added decent gains in London, portraying ease in the overall risk-off mood. US equities were heavily sold on Wednesday, driven by an intense sell-off in technology stocks. Investors are cautious that guidance from tech-savvy stocks could remain weak amid higher interest rates by the Federal Reserve (Fed).

The rally in USD/JPY is backed by expectations that policy divergence between the Fed and the Bank of Japan (BoJ) would escalate further as the Fed is expected to raise interest rates further while the BoJ will continue maintaining its decade-long ultra-dovish policy stance. The context has sent the Japanese Yen sharply lower against the US Dollar.

Reuters reported on Friday that the BoJ was leaning toward maintaining its yield curve control (YCC) strategy at next week's policy meeting. "Inflation is accelerating more than expected. But the key is whether the increase is sustainable, which will depend largely on corporate profits and next year's wage outlook," one of the sources told Reuters.

The US Dollar Index has climbed to near the immediate resistance of 101.00 as investors are pumping money into safe-haven assets, knowing the fact that more interest rate hikes by the Fed would deepen fears of recession. Contrary, the 10-year US Treasury yields have dropped to near 3.84%.