• USD/JPY gained strong positive traction on Tuesday and rallied to its highest level since 1998.
• The Fed-BoJ policy divergence, the risk-on impulse weighed on the JPY and extended support.
• Weaker USD might hold back bulls from placing fresh bets amid slightly overbought conditions.

The USD/JPY pair caught aggressive bids on Tuesday and surged past the 136.00 mark, hitting its highest level since October 1998 during the early North American session. The pair was last seen trading around the 136.25 region, up over 0.85% for the day.

The Japanese yen has been the worst-performing G10 currency since March amid the ultra-loose monetary policy stance adopted by the Bank of Japan. This has resulted in a further widening of the Japan-US interest rate differential. Apart from this, the strong rally in the global equity markets weighed heavily on the safe-haven Japanese yen and acted as a tailwind for the USD/JPY pair.

The risk-on impulse, along with expectations that the Fed would retain its aggressive policy tightening stance, pushed the US Treasury bond yields higher. This was seen as another factor that impressed bullish traders and provided an additional lift to the USD/JPY pair. The strong move up could also be attributed to some technical buying above the 135.50-135.60 double-top resistance.

Furthermore, oscillators on the daily chart are hovering near the overbought territory. This, in turn, warrants caution before placing fresh bullish bets amid modest US dollar weakness. Hence, a subsequent move up is likely to confront resistance near a two-week-old ascending trend-line, currently around mid-136.00s. Nevertheless, the USD/JPY pair now seems to have confirmed a fresh bullish breakout and any meaningful corrective pullback could be seen as a buying opportunity.

Technical levels to watch