USD/JPY consolidates in a range around 118.70 region, just below multi-year peak

• USD/JPY was seen consolidating its recent strong gains to the highest level since February 2016.
• Retreating US bond yields kept the USD bulls on the defensive and capped the upside for the pair.
• The risk-on mood undermined the safe-haven JPY and continued lending support to the major.
• Investors also preferred to wait for the BoJ decision on Friday before placing fresh bullish bets.

The USD/JPY pair oscillated in a range through the first half of the European session and was last seen trading around the 118.70 region, nearly unchanged for the day.

The pair struggled to find acceptance above the 119.00 mark and for now, seems to have stalled its recent strong bullish run-up to the highest level since February 2016. As investors digested the much-awaited FOMC policy decision, modest pullback in the US Treasury bond yields kept the US dollar bulls on the defensive. This, in turn, was seen as a key factor that acted as a headwind for the USD/JPY pair amid extremely overbought conditions on short-term charts.

As was widely expected, the Fed on Wednesday announced the start of the policy tightening cycle and hiked its target fund rate by 25 bps for the first time since 2018. The Fed also hinted to adopt a more aggressive policy to combat stubbornly high inflation. In fact, the so-called dot-plot indicated that the US central bank could raise rates at all the six remaining meetings in 2022. The decision, however, was in-line with expectations and failed to impress bulls.

In the post-meeting press conference, Fed Chair Jerome Powell sounded more hawkish and emphasised that the economy was strong enough to withstand tighter monetary policy. Powell further added that the US central bank could start shrinking its near $9 trillion balance sheet as soon as the next meeting in May. Conversely, the Bank of Japan (BoJ) is anticipated to maintain the current accommodative policy stance at its upcoming policy meeting on Friday.

The divergence in the BoJ-Fed policy outlooks, along with the optimism over the possibility of a diplomatic solution to end the war in Ukraine could undermine the safe-haven Japanese yen. This, in turn, favours bullish traders and supports prospects for an extension of the recent strong upward trajectory witnessed over the past two weeks or so. Traders, however, preferred to wait for the BoJ policy decision before placing fresh bullish bets.

In the meantime, the US economic docket, featuring the release of the Philly Fed Manufacturing Index, the usual Weekly Initial Jobless Claims and Industrial Production data will be looked upon for some impetus. Apart from this, fresh developments surrounding the Russia-Ukraine saga, the broader risk sentiment and the US bond yields should produce some short-term trading opportunities around the USD/JPY pair.

Technical levels to watch