USD/JPY climbs to over one-month high, around 115.35 amid stronger USD/positive risk tone

• A combination of factors pushed USD/JPY to over a one-month high on Monday.
• The risk-on mood undermined the safe-haven JPY and remained supportive.
• Resurgent USD demand further contributed to the ongoing positive momentum.

The USD/JPY pair edged higher through the early European session and shot to the highest level since November 29, around the 115.35 region in the last hour.

A combination of factors assisted the USD/JPY pair to gain some follow-through traction on the first trading day of the new year and prolong a one-month-old upward trajectory. The latest optimism over signs that the Omicron variant might be less severe than feared and is unlikely to derail the economic recovery remained supportive of the underlying bullish sentiment in the markets. This, in turn, undermined the safe-haven Japanese yen and pushed the pair higher amid resurgent US dollar demand.

The USD made a solid comeback in quiet holiday trading on Monday and reversed a major part of last week's slide to a one-month low. The Fed's hawkish outlook, indicating at least three rate hikes in 2022, along with elevated US Treasury bond yields turned out to be a key factor that acted as a tailwind for the buck. It is worth recalling that the yield on the benchmark 10-year US government bond recorded the largest yearly increase since 2013 and ended 2021 above the 1.50% threshold.

It will now be interesting to see if bulls are able to capitalize on the move or opt to lighten their positions ahead of important US macro releases scheduled at the beginning of a new month. This week's US economic docket highlights the release of ISM PMIs and the ADP report on private-sector employment. The focus, however, will remain on the closely-watched US monthly jobs report (NFP) on Friday.

In the meantime, developments surrounding the coronavirus saga will play a key role in influencing the broader market risk sentiment and drive demand for the safe-haven JPY. Apart from this, traders will further take cues from the US bond yields and the USD price dynamics to grab some short-term opportunities. That said, investors might refrain from placing aggressive directional bets, rather prefer to wait on the sidelines on the back of an extended weekend in Europe and the US.

Technical levels to watch