USD/JPY consolidates recent gains to near one-month high, steady below mid-114.00s

• The risk-on mood undermined the safe-haven JPY and acted as a tailwind for USD/JPY.
• Subdued USD price action capped the upside amid year-end thin liquidity conditions.
• The fundamental backdrop supports prospects for an extension of the recent move up.

The USD/JPY pair remained confined in a range through the early European session and was last seen trading just below mid-114.00s, or a near one-month high touched earlier this Friday.

The prevalent risk-on environment – as depicted by an extension of the recent rally in the equity markets – continued undermining the safe-haven Japanese yen. This, in turn, was seen as a key factor that acted as a tailwind for the USD/JPY pair, though subdued US dollar price action kept a lid on any meaningful upside.

The recent optimism was led by reports indicating that the current vaccines may be more effective than first thought in fighting the Omicron variant. Adding to this, studies suggested that the Omicron infections are less likely to lead to hospitalization, which further boosted investors' appetite for perceived riskier assets.

Bullish traders further took cues from the recent leg up in the US Treasury bond yields, bolstered by the Fed's hawkish outlook and strong US inflation data released on Thursday. It is worth recalling that the so-called dot plot indicated that the Fed officials expect to raise the fed funds rate at least three times next year.

The Personal Consumption Expenditures (PCE) Price Index – the Fed's preferred inflation gauge – accelerated to 5.7% YoY in November, marking the largest annual growth since 1982. This lifted expectations for a Fed liftoff in March 2022, which supports prospects for the emergence of some USD dip-buying and further gains for the USD/JPY pair.

Investors, however, seemed reluctant to place aggressive bets amid the year-end thin liquidity conditions and absent relevant market moving economic releases. This, in turn, suggests that the USD/JPY pair is more likely to prolong its range-bound price action and consolidate its recent gains recorded over the past three weeks or so.

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