• USD/JPY continued scaling higher on the first day of a new trading week.
• The formation of an upward sloping trend channel favours bullish traders.
• Overbought RSI warrants some caution before positioning for further gains.

The USD/JPY pair built on last week's bullish momentum and gained strong follow-through traction on the first day of a new trading week. This marked the third consecutive day of a positive move – also the fourth in the previous five – and pushed the pair to the highest level since December 2018, beyond the 113.00 mark.

Expectations that the Fed would begin tapering its bond purchases as soon as November, along with rising bets for a possible interest rate hike in 2022 acted as a tailwind for the US dollar. On the other hand, the recent widening US-Japanese yields differential further inspired bullish traders and remained supportive.

Meanwhile, fears of a return of stagflation – high inflation and low growth – tempered investors' appetite for perceived riskier assets. This was evident from a softer tone around the equity markets, which might extend some support to the safe-haven Japanese yen and held bulls from placing fresh bets around the USD/JPY pair.

From a technical perspective, the recent strong move up from the vicinity of the 109.00 round-figure mark has been along an upward sloping channel. This points to a well-established short-term uptrend and supports prospects for additional gains, though overbought RSI on hourly charts warrants some caution for bullish traders.

Hence, it will be prudent to wait for some intraday consolidation or a modest pullback before positioning for any further appreciating move. Nevertheless, the USD/JPY pair seems all set to climb further towards challenging a resistance marked by the top end of the mentioned channel, currently around mid-113.50 region.

On the flip side, any meaningful retracement slide could be seen as a buying opportunity. This, in turn, should help limit the downside near the 112.25-20 horizontal support. This is closely followed by the 112.00 round-figure mark, which if broken might prompt some technical selling and pave the way for a deeper corrective pullback.

USD/JPY 4-hour chart

Technical levels to watch