USD/JPY sticks to modest gains near weekly high, just above 124.00 mark

• USD/JPY edged higher for the fifth straight day and climbed to over a one-week high on Friday.
• The Fed-BoJ monetary policy divergence continued acting as a tailwind and remained supportive.
• The fundamental backdrop supports prospects for a move back towards the 125.00 round figure.

The USD/JPY pair traded with a mild positive bias through the first half of the European session and was last seen hovering around the 124.10 region, just a few pips below the weekly high.

A combination of factors assisted the USD/JPY pair to reverse an intraday dip to the 123.65 region and edge higher for the fifth successive day on Friday. The widening interest rate gap between Japan and the United States, along with a goodish rebound in the global equity markets, weighed on the safe-haven Japanese yen. Apart from this, the prevalent bullish sentiment surrounding the US dollar acted as a tailwind for spot prices.

The USD climbed to its highest level since May 2020 and continued drawing support from expectations that the Fed would tighten its monetary policy at a faster pace. In fact, the March 15-16 FOMC minutes released on Wednesday showed that policymakers were prepared to hike interest rates by 50 bps at upcoming meetings. This, along with inflation fears, remained supportive of elevated US Treasury bond yields and underpinned the USD.

Investors remain concerned that the recent surge in fuel costs following Russia's invasion of Ukraine could put upward pressure on the already higher consumer inflation. Despite the market worries, Bank of Japan board member Asahi Noguchi said on Thursday that the central bank must maintain its ultra-easy monetary policy.

Moreover, the BoJ has repeatedly said that it remains ready to use powerful tools to avoid long-term interest rates from rising too much. It is worth recalling that BoJ last week offered to buy unlimited 10-year Japanese government bonds to defend the 0.25% yield cap. This has led to a further widening of the US-Japanese bond yields differential.

The fundamental backdrop favours bullish traders and should continue to lend support to the USD/JPY pair. Even from a technical perspective, the formation of an ascending channel on short-term charts supports prospects for additional gains. Hence, a move back towards the 125.00 psychological mark, or the multi-year high, remains a distinct possibility.

In the absence of any major market-moving economic releases from the US, the US bond yields will influence the USD price dynamics and provide some impetus to the USD/JPY pair. Traders will further take cues from developments surrounding the Russia-Ukraine saga, which will drive the broader market risk sentiment and safe-haven demand.

Technical levels to watch