USD/JPY consolidates in a range near multi-year peak, traders await FOMC decision

• USD/JPY oscillated in a range near the multi-year peak through the early European session.
• The emergence of some USD selling forced bulls to take a breather after the recent run-up.
• A combination of factors continued lending some support as the focus remains on the Fed.

The USD/JPY pair remained confined in a narrow trading band through the first half of the European session and consolidated its recent strong gains to the multi-year peak. The pair was last seen trading around the 118.30-118.35 region, nearly unchanged for the day.

Following the recent bullish run of over 350 pips witnessed since the beginning of the last week, bulls took a breather on Wednesday amid the emergence of some US dollar selling. Apart from this, extremely overbought conditions capped the USD/JPY pair just ahead of the 2017 swing high. That said, a combination of factors continued acting as a tailwind for the pair and supports prospects for additional near-term gains.

Hopes for a possible diplomatic solution to end the war in Ukraine, along with reports that China will keep the stock market stable triggered a fresh wave of the risk-on trade. This was evident from a generally positive tone around the equity markets, which undermined traditional safe-haven assets and weighed on the Japanese yen. Bulls further took cues from elevated US Treasury bond yields, bolstered by hawkish Fed expectations.

In fact, the markets seem convinced that the recent geopolitical developments might do little to hold back the Fed from hiking interest rates to combat high inflation. The prospects for an imminent start of the policy tightening cycle by the Fed pushed the yield on the benchmark 10-year government bond to the highest level since June 2019. This favours the USD bulls and adds credence to the near-term bullish outlook for the USD/JPY pair.

Investors, however, seemed reluctant to place aggressive bets and preferred to wait for the outcome of a two-day FOMC monetary policy meeting, due later during the US session. Heading into the key central bank event risk, traders will take cues from the release of the US monthly Retail Sales data. Apart from this, fresh developments surrounding the Russia-Ukraine saga will be looked upon for some trading impetus around the USD/JPY pair.

Technical levels to watch