USD/JPY holds steady near multi-year peak, comfortably above 119.00 mark

• USD/JPY was seen consolidating its recent strong gains to the highest level since February 2016.
• A softer risk tone extended some support to the safe-haven JPY and capped gains for the major.
• Elevated US bond yields, the Fed’s hawkish outlook underpinned the USD and acted as a tailwind.
• The divergent Fed-BoJ monetary policy outlook supports prospects for further near-term gains.

The USD/JPY pair extended its sideways/consolidative price moves through the mid-European session and remained confined in a range just a few pips below the multi-year peak set on Friday. The pair was last seen trading around the 119.20-119.25 region, nearly unchanged for the day.

Following the recent strong run-up of over 450 pips from the monthly low, around the 114.65 region, a softer risk tone drove some haven flows towards the Japanese yen and capped the USD/JPY pair.  The worsening situation in Ukraine kept a lid on the recent optimistic move in the markets and benefitted traditional safe-haven assets.

Ukraine's government defiantly rejected Russian calls to surrender the port city of Mariupol in exchange for humanitarian corridors. This comes after Russian forces advanced into the besieged port of Mariupol following one of the deadliest rockets strikes on Saturday. This, in turn, tempered investors' appetite for riskier assets.

Investors, however, remain hopeful about an eventual Russia-Ukraine peace deal. In fact, Turkey's foreign minister had said that both sides were nearing an agreement on critical issues. This, along with the divergent monetary policy adopted by the Fed and the Bank of Japan (BoJ), should act as a tailwind for the USD/JPY pair.

It is worth recalling that the Fed last week announced the start of the policy tightening cycle and indicated that it could raise rates at all the six remaining meetings in 2022. Moreover, influential FOMC members have backed the case for a more aggressive policy stance by the US central bank to combat stubbornly high inflation.

The Fed's hawkish outlook remained supportive of elevated US Treasury bond yields. This has resulted in a further widening of the spread between the US and Japanese 10-year government bond yields amid a more dovish BoJ. The fundamental backdrop supports prospects for further gains for the USD/JPY pair, though overbought RSI warrants caution.

Investors also seemed reluctant to place aggressive bets and preferred to wait on the sidelines ahead of Fed Chair Jerome Powell's speech later during the US session. In the meantime, the US bond yields will influence the USD price dynamics. Apart from this, the broader risk sentiment could provide some impetus to the USD/JPY pair.

Technical levels to watch