USD/JPY prolongs dovish BoJ-inspired rally, surges to fresh two-decade high around 131.00

• USD/JPY caught aggressive bids on Thursday after the BoJ stuck to its ultra-dovish stance.
• The prospects for faster Fed rate hikes continued boosting the USD and remained supportive.
• The strong momentum pushed spot prices through the key 130.00 psychological barrier.

The USD/JPY pair continued scaling higher through the first half of the European session and rallied to the 131.00 neighbourhood, or a fresh two-decade high in the last hour.

The pair built on the previous day's goodish rebound from sub-127.00 levels and gained strong follow-through traction for the second successive day on Thursday. The sharp intraday rally followed after the Bank of Japan announced its monetary policy decision and reaffirmed its dovish stance. 

In fact, the Japanese central bank vowed to keep its existing ultra-loose monetary policy settings and promised to conduct daily operations to defend its “near-zero” target for 10-year bond yields. The BoJ believes that Japan’s underlying economy is too fragile to tighten monetary policy. In the post-meeting press conference, the BoJ Governor Haruhiko Kuroda said that risks to the economy are skewed to the downside for the time being and showed readiness to ease policy further if necessary. This, along with the risk-on impulse, weighed heavily on the safe-haven Japanese yen.

On the other hand, the US dollar climbed to a five-year peak and remained supported by the prospects of a faster policy tightening by the Fed. This reflects the widening BoJ-Fed policy divergence and pushed the USD/JPY pair through a key psychological barrier near the 130.00 round-figure mark. Hence, the strong move up could further be attributed to some technical buying above the aforementioned handle. That said, speculations that the recent freefall in the JPY could trigger verbal intervention might hold back bulls from placing fresh bets amid extremely overbought conditions.

Market participants now look forward to the US economic docket, highlighting the release of the Advance Q1 GDP report and the usual Weekly Initial Jobless Claims. This data might influence the USD, which, along with the broader risk sentiment, should provide some impetus to the USD/JPY pair.

Technical levels to watch