USD/JPY sits near multi-year high, eyeing 116.00 amid risk-on/rising US bond yields

• USD/JPY jumped to the highest level since January 2017 during the early part of trading on Tuesday.
• The risk-on mood continued undermining the safe-haven JPY and continued pushing the pair higher.
• Elevated US bond yields acted as a tailwind for the USD and remained supportive of the strong move.

The USD/JPY pair maintained its strong bid tone heading into the European session and was last seen trading near a five-year high, around the 115.75-80 region.

A combination of supporting factors assisted the USD/JPY pair to gain follow-through traction on Tuesday and build on its recent bullish breakout through the key 115.00 psychological mark. Despite the continuous surge in new COVID-19 cases, investors remain optimistic over signs that the Omicron variant might be less severe than feared and is unlikely to derail the economic recovery. This was evident from the recent strong runup in the equity markets to record highs, which undermined the safe-haven Japanese yen.

Bulls further took cues from the overnight sharp spike in the US Treasury bond yields and a modest US dollar strength. In fact, the yield on the benchmark 10-year US government bond surged to 1.6420% for the first time since November 24 amid expectations for a faster policy tightening by the Fed. The combination of factors acted as a tailwind for the greenback. This was seen as another factor that provided an additional boost to the USD/JPY pair and contributed to the strong move up to the highest level since January 2017.

It will now be interesting to see if bulls are able to capitalize on the momentum or opt to take some profits off the table ahead of this week's key event/data risks. A rather busy week kicks off with the release of ISM Manufacturing PMI and JOLTS Job Openings data later during the early North American session on Tuesday. The Fed is due to release the minutes of its December meeting on Wednesday. Apart from this, investors will take cues from the ADP report on Wednesday and the ISM Services PMI on Thursday. The key focus, however, will remain on the closely watched US monthly jobs report – popularly known as NFP on Friday.

Technical levels to watch