USD/JPY rallies to fresh two-decade high, bulls eyeing to reclaim 134.00 mark

• USD/JPY scaled higher for the fourth straight day and shot to a fresh two-decade high.
• The Fed-BoJ monetary policy divergence continued driving flows away from the JPY.
• Overbought conditions warrant some caution for bulls ahead of the US CPI on Friday.

The USD/JPY pair prolonged its recent bullish trajectory witnessed over the past two weeks or so and gained strong follow-through traction for the fourth successive day on Wednesday. This also marked the seventh day of a positive move in the previous eight and pushed spot prices to the highest level since March 2002, around the 133.85 region during the first half of the European session.

A big divergence in the monetary policy stance adopted by the Bank of Japan (dovish) and the Fed (hawkish) was seen as a key factor behind the Japanese yen's underperformance since the beginning of 2022. In fact, BoJ Governor Haruhiko Kuroda reiterated on Wednesday that the central bank must continue its support for the economic activity by keeping its existing ultra-loose policy settings. Moreover, the BoJ has also promised to conduct unlimited bond purchase operations to defend its near-zero target for 10-year yields.

In contrast, the yield on the benchmark 10-year US government bond moved back above 3.0%, closer to a nearly four-week high touched earlier this week amid worries about persistent inflation. Investors remain concerned that the global supply chain disruption caused by the Russia-Ukraine war would continue to push consumer prices higher. This might force the Fed to tighten its monetary policy at a faster pace, which, in turn, helped revive demand for the US dollar and further acted as a tailwind for the USD/JPY pair.

Apart from the aforementioned factors, the strong move up could also be attributed to technical buying following a convincing breakout through the 131.25-131.35 double-top resistance earlier this week. That said, extremely overbought conditions on short-term charts warrant some caution before positioning for any further appreciating move. Investors might also prefer to wait on the sidelines ahead of the US consumer inflation figures on Friday, which would determine the Fed's tightening path. This, in turn, will influence the near-term USD price dynamics and provide a fresh directional impetus to the USD/JPY pair.

Technical levels to watch