USD/JPY rallies to the highest level since June 2015, closer to mid-125.00s

• USD/JPY caught aggressive bids on Monday and surged to a fresh multi-year peak.
• The BoJ cut its assessment for most regional economies and undermined the JPY.
• The widening of the US-Japanese bond yield differential further weighed on the JPY.
• The underlying USD bullish sentiment remained supportive of the strong move up.

The USD/JPY pair continued scaling higher through the early European session and shot to its highest level since June 2015, around the 125.40-125.45 region in the last hour.

Following an early dip to the 124.00 mark, the USD/JPY pair caught fresh bids on the first day of a new week and was supported by a combination of factors. The Bank of Japan cut its assessment for most regional economies and Governor Haruhiko Kuroda warned of very high uncertainty over the fallout from the Ukraine crisis. Adding to this, the widening of the US-Japanese government bond yield differential drove flows away from the JPY and acted as a tailwind for spot prices amid sustained US dollar buying interest.

The markets seem convinced that the Fed tighten its monetary policy at a faster pace to curb soaring inflation. This, along with worries that the recent rise in commodity prices would put upward pressure on already high consumer prices, pushed the US Treasury bond yields to a fresh multi-year peak. This, in turn, assisted the USD to hold steady near its highest level since May 2020. Conversely, caution around the BoJ's intervention to defend its 0.25% yield target limited the upside in the Japanese government bond.

Apart from the aforementioned fundamental factors, the latest leg of a sudden spike over the past hour or so could be attributed to some technical buying above the 125.00 psychological mark. A subsequent move beyond the previous YTD high, the 125.10 area could be seen as a fresh trigger for bullish traders and might have set the stage for additional gains. That said, overbought conditions on the daily chart warrant caution. Investors might also refrain from placing aggressive bullish bets ahead of the US CPI report on Tuesday.

In the absence of any major market-moving economic releases from the US, the US bond yields would continue to play a key role in influencing the USD price dynamics. Apart from this, traders might take cues from fresh developments surrounding the Russia-Ukraine saga. The incoming geopolitical headlines would drive the risk sentiment and demand for the safe-haven JPY, which, in turn, should provide impetus to the USD/JPY pair.

Technical levels to watch