USD/JPY consolidates recent gains to a near five-year top, below mid-115.00s

• USD/CAD remained confined in a range below mid-115.00s through the Asian session.
• A modest USD profit-taking from a 16-month peak acted as a headwind for the major.
• A generally positive risk tone, hawkish Fed expectations should help limit the downside.

The USD/JPY pair consolidated its recent strong gains to a near five-year high and oscillated in a narrow band, below mid-115.00s through the Asian session.

The US dollar witnessed some profit-taking following the recent runup to the highest level since July 2020, which, in turn, was seen as a key factor that acted as a headwind for the USD/JPY pair. The downside, however, remains cushioned amid a generally positive tone around the equity markets, which tends to undermine demand for the safe-haven Japanese yen. Meanwhile, the prospects for an early policy tightening by the Fed should help limit any meaningful USD pullback and continue lending some support to the major.

The market expectations were reinforced by hawkish FOMC monetary policy minutes released on Wednesday. In fact, policymakers were open to speeding up the tapering of the bond-buying program and moving quickly to raise interest rates if high inflation persists. This comes on the back of data, which showed that the US PCE Price Index accelerated a 30-year high in October. This, in turn, supports prospects for the emergence of some dip-buying around the greenback and an extension of the recent appreciating move for the USD/JPY pair.

That said, relatively thin liquidity conditions on the back of the Thanksgiving holiday in the US might hold back traders from placing aggressive bullish bets. Moreover, slightly overstretched conditions on short-term charts makes it prudent to wait for some near-term consolidation before the next leg up. Nevertheless, the bias remains tilted in favour of bullish traders and any corrective pullback is likely to be short-lived.

Technical levels to watch