USD/JPY pares intraday gains to its highest level since April 2002, downside seems limited

• USD/JPY shot to a fresh two-decade high on Monday, though struggled to capitalize on the move.
• The risk-off mood underpinned the safe-haven JPY and capped the pair amid modest USD pullback.
• The Fed-BoJ policy divergence favours bullish traders and supports prospects for additional gains.

The USD/JPY pair surrendered a major part of its intraday gains and dropped to the lower end of its daily trading range, around the 130.75-130.70 area during the early North American session.

The pair struggled to capitalize on its early positive move and witnessed modest pullback from the 131.35 area, or the highest level since April 2002 touched earlier this Monday. The prevalent risk-off mood - as depicted by a weaker tone around the equity markets - underpinned the safe-haven Japanese yen. On the other hand, the US dollar eased a bit from a two-decade high, which was seen as another factor that exerted some pressure on the USD/JPY pair. The downside, however, remains cushioned amid a big divergence in the monetary policy stance adopted by the Bank of Japan and the Fed.

The Japanese central bank has vowed to keep its existing ultra-loose policy settings and promised to conduct unlimited bond purchase operations to defend its “near-zero” target for 10-year yields. In contrast, Fed Chair Jerome Powell said last week that policymakers were ready to approve a 50 bps increase at upcoming meetings. Moreover, the markets are pricing in a further 200 bps rate hike by the Fed for the rest of 2022. This, along with concerns about rapidly rising consumer prices, pushed the yield on the benchmark 10-year US government bond to its highest level in more than a decade.

Hence, the focus now shifts to the release of the latest US consumer inflation figures on Wednesday. Nevertheless, the fundamental backdrop remains tilted firmly in favour of the USD bulls and supports prospects for the emergence of some dip-buying around the USD/JPY pair. That said, slightly overbought conditions make it prudent to wait for some near-term consolidation before positioning for any further appreciating move amid absent relevant market moving economic releases from the US.

Technical levels to watch