USD/JPY retreats after hitting fresh 32-year peak. Still well bid around mid-151.00s

• USD/JPY builds on the breakout rally beyond 150.00 and surges to a new 32-year high.
• The Fed-BoJ policy divergence, widening US-Japan rate differential weighs on the JPY.
• Hawkish Fed expectations, elevated US bond yields lift the USD and remain supportive.

The USD/JPY pair adds to its strong intraday gains and continues scaling higher through the early North American session. The momentum, however, stalls ahead of the 152.00 round-figure mark and spot prices quickly retreat to mid-151.00s in the last hour.

The Japanese yen has been the worst-performing G10 currency and has depreciated over 30% against the US dollar since the beginning of this year. A big divergence in the monetary policy stance adopted by the Bank of Japan and the Federal Reserve turns out to be a key factor behind the USD/JPY pair's bullish move.

In fact, the BoJ remains committed to continuing with its monetary easing and so far, has shown no inclination to hike interest rates from ultra-low levels. Furthermore, the Japanese central bank announced emergency bond-buying worth $667 million to keep the yields on the Japanese Government Bonds below 0.25%.

In contrast, the yield on the benchmark 10-year US Treasury note hits its highest level since the 2008 financial crisis amid expectations for a more aggressive policy tightening by the Fed. This results in the widening of the US-Japan rate differential, which, along with resurgent US dollar demand, boosts the USD/JPY pair.

Apart from this, Friday's strong rally could also be attributed to some technical buying following the overnight breakout through the 150.00 psychological mark. That said, reports that the Fed could debate on whether and how to signal plans to approve a smaller increase in December prompts some USD selling and caps the USD/JPY pair.

Moreover, extremely overstretched technical indicators on short-term charts warrant some caution and might hold back bullish traders from placing fresh bets. Nevertheless, the USD/JPY pair remains on track to register its 10th straight weekly advance as the focus now shifts to the BoJ monetary policy meeting on October 28.

Technical levels to watch