USD/JPY rallies further beyond 116.00, fresh five-year high amid rising US bond yields

• A combination of supporting factors pushed USD/JPY to a fresh five-year high on Tuesday.
• The risk-on mood continued undermining the safe-haven JPY and remained supportive.
• Surging US bond yields benefitted the USD and provided an additional boost to the pair.

The USD/JPY pair added to its strong intraday gains and jumped to a fresh five-year high, around the 116.35 region heading into the North American session.

Despite the Omicron-driven rise in COVID-19 infections globally, investors remain optimistic amid hopes of steady economic recovery. This was evident from an extension of the bullish run in the equity markets to record highs, which continued underpinning the safe-haven Japanese yen and acted as a tailwind for the USD/JPY pair.

Bulls further took cues from surging US Treasury bond yields, which pushed the US dollar to a near two-week high on Tuesday and provided an additional boost to the USD/JPY pair. In fact, the yield on the benchmark 10-year US government bond shot to 1.666%, or the highest level since November 24 amid hawkish Fed expectations.

The money markets have been pricing in the possibility for an eventual Fed liftoff by May and two more rate hikes by the end of 2022. This was further reinforced by the fact that the US 2-year notes, which are sensitive to rate hike expectations along with 5-year notes, soared to their highest since February 2020.

The combination of factors assisted the USD/JPY pair to prolong its recent upward trajectory witnessed over the past one month or so and surge past the 2021 swing high, around mid-115.00s. The subsequent strength took along some short-term trading stops near the 116.00 mark and contributed to the ongoing strong bullish momentum.

Market participants now look forward to the US economic docket, highlighting the release of the ISM Manufacturing PMI and JOLTS Job Openings data. Apart from this, the US bond yields should influence the USD. Traders will further take cues from the broader market risk sentiment for some short-term opportunities around the USD/JPY pair.

Technical levels to watch