• USD/JPY regained positive traction on Wednesday and reversed the overnight slide to a one-week low.
• Aggressive Fed rate hike bets, an uptick in the US bond yields pushed the USD to over a two-year high.
• The risk-on impulse, the Fed-BoJ policy divergence undermined the JPY and provided an additional lift.

The USD/JPY pair climbed to a fresh daily high during the early European session and is now looking to build on the momentum further beyond the 128.00 round-figure mark.

A combination of factors assisted the USD/JPY pair to attract fresh buying on Wednesday and reverse a major part of the previous day's slide to a one-week low. A solid recovery in the US equity futures undermined the safe-haven Japanese yen, which was further weighed down by the divergent policy stance adopted by the Fed and Bank of Japan.

The recent hawkish comments by influential FOMC members, including Fed Chair Jerome Powell, reaffirmed expectations for a more aggressive policy tightening by the US central bank. In fact, the markets now anticipate that the Fed would raise interest rates by 50 bps at each of its next four meetings in May, June, July and September.

The prospects for rapid rate hikes in the US, along with an uptick in the US Treasury bond yields, pushed the US dollar to its highest level since the start of the COVID-19 pandemic in March 2020. In contrast, the BoJ again offered to buy unlimited amounts of Japanese government bonds on Tuesday to defend the 0.25% yield cap.

Moreover, the BoJ has repeatedly said that it remains ready to use powerful tools to avoid long-term rates from rising too much and sustain the ultra-loose monetary policy to support economic recovery. Adding to this, the Japanese central bank is expected to announce additional stimuli to boost the aggregate demand.

Hence, the market focus will remain glued to the BoJ monetary policy decision, scheduled to be announced during the Asian session on Thursday. In the meantime, the fundamental backdrop favours bullish traders, suggesting that the recent corrective pullback from the two-decade high, around the 129.40 region has run its course.

Market participants now look forward to second-tier US economic releases for some impetus later during the early North American session. The data, along with the US bond yields, might influence the USD price dynamics. Apart from this, traders will take cues from broader market risk sentiment for short-term opportunities around the USD/JPY pair.

Technical levels to watch