USD/JPY Price Analysis: Bulls retain control near multi-year peak, just above mid-125.00s

• USD/JPY caught aggressive bids on Monday and surged to a fresh multi-year peak.
• The momentum confirmed a bullish breakout through an ascending trend channel.
• Overbought oscillators warrant caution before positioning for any further move up.

The USD/JPY pair rallied over 175 pips from the vicinity of the 124.00 mark on Monday and jumped to the highest level since June 2015, around the 125.75 region during the mid-European session.

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 the USD/JPY pair.

The prospects for a more aggressive policy tightening by the Fed, along with inflation fears, pushed the US Treasury bond yields to a fresh multi-year peak on the first day of a new week. Conversely, caution around the Bank of Japan's intervention to defend its 0.25% yield target limited the upside in the Japanese government bond.

This, to a larger extent, helped offset a generally weaker tone around the equity markets, which tends to underpin the safe-haven Japanese yen. On the other hand, the US dollar was seen consolidating its recent strong gains to the highest level since May 2020, albeit did little to hinder the USD/JPY pair's strong move up.

From a technical perspective, the momentum beyond the previous YTD peak, around the 125.10 area, was seen as a fresh trigger for bullish traders. A subsequent breakthrough an upward sloping channel extending from the March 31 swing low, around the 121.30-121.25 region, might have set the stage for additional gains.

Technical indicators, however, are already flashing extremely overbought conditions on hourly/daily charts and warrant some caution. Traders might also refrain from placing aggressive bullish bets and prefer to wait for a fresh catalyst from the latest US consumer inflation figures, scheduled for release on Tuesday.

Nevertheless, the bias seems tilted firmly in favour of bullish traders and supports prospects for an extension of the recent strong move up witnessed over the past one month or so. That said, it will be prudent to wait for some near-term consolidation or modest pullback before positioning for the USD/JPY pair's next leg up.

In the meantime, the 125.00 psychological mark now seems to protect the immediate downside. Failure to defend the said handle might trigger some long-unwinding trade and drag the USD/JPY pair back towards the 124.00 round-figure mark. The latter coincides with the aforementioned trend channel and should act as a strong base.

On the flip side, bulls are likely to target the 2015 high, around the 125.85 region, which is closely followed by the 126.00 round figure and resistance near the 126.20 area. Some follow-through buying will reaffirm the constructive outlook and set the stage for a move towards the 127.00 mark for the first since 2002.

USD/JPY 4-hour chart

Key levels to watch