USD/JPY stands tall near YTD peak, bulls turn cautious amid intervention fears

• USD/JPY refreshes YTD top during the Asian session on Monday, albeit lacks follow-through.
• Intervention fears, along with a softer risk tone, underpin the JPY and caps gains for the pair.
• The Fed-BoJ policy divergence still favours bulls and supports prospects for a further move up.

The USD/JPY pair touches a fresh high since November 2022 during the Asian session on Monday, albeit struggles to capitalize on the modest uptick beyond mid-148.00s.

Speculations that Japanese authorities will intervene in the foreign exchange market to support the domestic currency, along with a weaker risk tone, lend some support to the safe-haven Japanese Yen (JPY). In fact, Japan’s Finance Minister Shunichi Suzuki issued a fresh warning against the recent JPY weakness and said that the government will not rule out any options in addressing excess volatility in currency markets. This, in turn, is holding back traders from placing fresh bullish bets around the USD/JPY pair and acting as a headwind. The downside, however, remains cushioned in the wake of a big divergence in the monetary policy stance adopted by the Federal Reserve (Fed) and the Bank of Japan (BoJ).

The US central bank, as was anticipated, decided to leave interest rates unchanged at the end of the September policy meeting last Wednesday, though showed readiness to hike interest rates until inflation returns to its 2% target. In fact, the Fed warned that the still-sticky US inflation was likely to attract at least one more 25 bps lift-off by the year-end. Moreover, the so-called 'dot-plot' indicated just two rate cuts next year as compared to four projected previously. Moreover, the incoming resilient US macro data should allow the Fed to keep interest rates higher for longer. The hawkish outlook, in turn, pushes the yield on the rate-sensitive two-year US government bond to its highest level since July 2006.

Moreover, the benchmark 10-year Treasury yield holds steady near a 16-year peak touched last Friday. This, in turn, assists the US Dollar (USD) to stand tall just below a more than six-month peak and continues to lend support to the USD/JPY pair. The JPY, on the other hand, is pressured by the fact that the BoJ on Friday refrained from offering any hint about potential alterations in its dovish stance in the foreseeable future. In the post-meeting press conference, BoJ Governor Kazuo Ueda noted that there is no change to the way of the policy decision-making process and that the central bank is yet to foresee inflation reaching the 2% target in a stable manner. As such, the BoJ will continue to maintain an ultra-loose monetary policy.

The aforementioned fundamental backdrop seems tilted firmly in favour of the USD/JPY bulls. Hence, any meaningful corrective pullback might still be seen as a buying opportunity and remain limited in the absence of any relevant market-moving economic releases on Monday.

Technical levels to watch