USD/JPY rallies to levels beyond 142.00 mark, highest since August 1998

• USD/JPY prolongs its recent strong bullish momentum and surges to a fresh 24-year peak.
• The Fed-BoJ policy divergence, widening US-Japan rate differential weigh heavily on the JPY.
• The emergence of fresh USD buying provides an additional boost and contributes to the rally.

The USD/JPY pair catches aggressive bids on Tuesday and rallies to levels just above the 142.00 mark, hitting a fresh 24-year high during the mid-European session.

The Japanese yen continues with its relative underperformance amid bets that the Bank of Japan’s ultra-loose monetary policy would continue. In contrast, the Federal Reserve is expected to stick to its aggressive policy-tightening path to tame inflation. This marks a big divergence in the monetary policy stance adopted by two major central banks and assists the USD/JPY pair to prolong a nearly one-month-old upward trajectory.

The recent hawkish remarks by several Fed officials reinforced market expectations for a supersized 75 bps rate hike at the September FOMC policy meeting. This remains supportive of elevated US Treasury bond yields, widening the US-Japan rate differential. Apart from this, the risk-on impulse - as depicted by a positive tone around the equity markets - undermines the safe-haven JPY and contributes to the USD/JPY pair's strong positive move.

The momentum is also supported by the emergence of fresh buying around the US dollar, which climbs back closer to a two-decade high amid hawkish Fed expectations. Furthermore, a sustained move above the previous YTD peak and a subsequent strength beyond the 141.00 mark seem to have prompted some technical buying around the USD/JPY pair. That said, the slightly overbought RSI (14) on the daily chart warrants some caution for aggressive bullish traders.

Nevertheless, the fundamental backdrop suggests that the path of least resistance for the USD/JPY pair is to the upside and any meaningful pullback might still be seen as a buying opportunity. Market participants now look forward to the US economic docket, featuring the ISM Services PMI for a fresh impetus during the early North American session. Traders will further take cues from the US bond yields, the USD price dynamics and the broader risk sentiment.

Technical levels to watch