USD/JPY flirts with YTD peak, eyes 135.00 mark amid broad-based USD strength

• USD/JPY catches fresh bids on Friday and challenges the YTD top amid sustained USD buying.
• Hawkish Fed expectations push the US bond yields higher and continue to underpin the buck.
• Recession fears, hopes for a hawkish BoJ shift could benefit the JPY and cap any further gains.

The USD/JPY pair regains positive traction following the previous day's modest downtick and rallies back closer to the YTD peak during the Asian session on Friday. The pair currently trades around the 134.70-134.75 region and seems poised to prolong its uptrend witnessed since the beginning of this month.

The US Dollar buying remains unabated on the last day of the week amid firming expectations that the Fed will stick to its hawkish stance, which, in turn, acts as a tailwind for the USD/JPY pair. In fact, the USD Index, which tracks the Greenback against a basket of currencies, hits a fresh six-week low as investors now seem convinced that interest rates are going to remain elevated for longer.

The bets were lifted by the incoming positive US macro data, which point to a resilient economy despite rising borrowing costs and stubbornly high inflation. Adding to this, hawkish remarks by a slew of FOMC members suggest that the US central bank will continue to tighten its monetary policy. This, in turn, pushes the US Treasury bond yields higher across the board and underpins the Greenback.

In fact, the yield on the benchmark 10-year US government bond climbs to the highest level since late December. This results in the widening of the US-Japan rate differential, which is seen driving flows away from the Japanese Yen (JPY) and providing an additional boost to the USD/JPY pair. That said, a combination of factors could limit losses for the JPY and cap the upside for the major.

Worries about economic headwinds stemming from rapidly rising borrowing costs continue to weigh on investors' sentiment, which is evident from a generally weaker tone around the equity markets. Adding to this, speculations that the Bank of Japan (BoJ) governor candidate Kazuo Ueda will dismantle the yield curve control easing mechanism could lend some support to the safe-haven JPY.

Nevertheless, the USD/JPY pair remains on track to post strong weekly gains. From a technical perspective, this week's sustained move beyond the 132.90-133.00 region could be seen as a fresh trigger for bullish traders and add credence to the positive outlook. Hence, some follow-through strength, towards reclaiming the 135.00 psychological mark, looks like a distinct possibility.

Technical levels to watch