• USD/JPY catches fresh bids and climbs back closer to the YTD peak amid resurgent USD demand.
• Hawkish Fed expectations push the US bond yields higher and provide a fresh lift to the Greenback.
• The divergent Fed-BoJ policy outlook favours bullish traders and supports prospects for further gains.

The USD/JPY pair is seen building on the overnight late rebound from the 135.25 area and steadily climbs back closer to the YTD peak during the early European session on Thursday. The pair currently trades around the 136.70 region, with bulls now awaiting a sustained strength beyond the 100-day Simple Moving Average (SMA) before placing fresh bets.

The US Dollar regains positive traction and reverses a part of the previous day's sharp retracement slide from a multi-week high amid a further rise in the US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond climbs further beyond the 4.0% threshold, hitting its highest level since November 2022, and remains well supported by expectations for further policy tightening by the Fed. The markets seem convinced that the US central bank will keep interest rates higher for longer than previously estimated in the wake of stubbornly high inflation.

The bets were lifted by the overnight hawkish remarks by Atlanta Fed President Raphael Bostic, reiterating the view that the policy rate needs to rise to the 5.00%-5.25% range and remain at that level well into 2024. Adding to this, Minneapolis Fed President Neel Kashkari reiterated that inflation in the US is still very high and that their job is to bring it down. Karikari also noted that the risk of under-tightening is greater than the risk of over-tightening.  Furthermore, the US ISM Manufacturing Index showed that the Prices Paid sub-component accelerated to 51.3 in February from 44.5.

The Japanese Yen (JPY), on the other hand, is undermined by the recent dovish remarks by the incoming BoJ Governor Kazuo Ueda and Deputy Governor nominee Shinichi Uchida, stressing the need to maintain the ultra-loose monetary policy.  That said, the cautious market mood - amid looming recession risks - could benefit the JPY's safe-haven status and cap the upside for the USD/JPY pair. Hence, it will be prudent to wait for a convincing breakout through the 100-day SMA barrier before positioning for an extension of the recent appreciating move witnessed over the past month or so.

Market participants now look forward to the release of the usual Weekly Initial Jobless Claims data from the US, due later during the early North American session. This, along with the US bond yields, will drive the USD demand and provide some impetus to the USD/JPY pair. Traders will further take cues from the broader risk sentiment to grab short-term opportunities ahead of speeches by influential FOMC members during the Asian session on Friday.

Technical levels to watch