USD/JPY extends the relentless rally to 125.00 mark, highest level since August 2015

• USD/JPY regained strong positive traction on Monday and rallied further beyond the 124.00 mark.
• The JPY witnessed heavy selling after the BoJ offered to buy an unlimited amount of 10-year JGBs.
• Hawkish Fed expectations underpinned the USD and remained supportive of the strong move up.

The USD/JPY pair continued scaling higher through the first half of the European session and surged to the key 124.00 psychological mark for the first time since August 2015.

Following Friday's modest downtick, the USD/JPY pair caught aggressive bids on the first day of a new week after the Bank of Japan (BoJ) steeped in to arrest the continuous rise in yields. In fact, the BoJ made two offers in a single day to buy unlimited amounts of 10-year Japanese government bonds (JGBs) to protect the 0.25% tolerance ceiling under its yield curve control policy.

Conversely, the yield on the benchmark 10-year US government bond shot to a nearly three-year high, beyond the 2.5% mark amid expectations for a more aggressive policy response by the Fed. This resulted in the further widening of the US-Japanese bond yield spread, which along with a generally positive tone around the equity markets, drove flows away from the safe-haven Japanese yen.

In fact, the markets have been pricing in a 50 bps Fed rate hike move in the May meeting amid worries that surging commodity prices would put upward pressure on the already high inflation. This, in turn, remained supportive of some follow-through US dollar buying, which provided an additional boost to the USD/JPY pair and took along some trading stops placed near the 124.00 mark.

Hence, the latest leg of a sudden spike over the past hour or so could further be attributed to some technical buying. This warrants some caution before placing fresh bullish bets amid extremely overbought conditions. In the absence of any relevant economic data, the US bond yields, the USD price dynamics and the broader risk sentiment should provide some impetus to the USD/JPY pair.

Technical levels to watch