• USD/JPY was seen consolidated its recent gains to the highest level since February 2016.
• Bulls took a breather amid extremely overbought conditions and modest USD weakness.
• The Fed-BoJ policy divergence supports prospects for an extension of the bullish trend.

The USD/JPY pair seesawed between tepid gains/minor losses through the early North American session and held steady near the 118.80-118.75 region, just a few pips below the multi-year peak.

The pair witnessed subdued/range-bound price move on Thursday and consolidated its recent strong run-up to the highest level since February 2016 amid extremely overbought conditions on short-term charts. A weaker tone around the equity markets drove some haven flows towards the Japanese yen. This, along with modest US dollar weakness, failed to assist the USD/JPY pair to find acceptance above the 119.00 round-figure mark.

That said, the growing Fed-BoJ policy divergence continued acting as a tailwind for the USD/JPY pair. In fact, the Fed on Wednesday announced the start of the policy tightening cycle and indicated that it would raise interest rates at all the six remaining meetings in 2022. Conversely, the Bank of Japan is expected to stick to its accommodative policy stance at the upcoming meeting on Friday, which should favour bullish traders.

Apart from this, hopes for a diplomatic solution to end the war in Ukraine should keep a lid on any meaningful gains for the JPY and adds credence to the constructive outlook for the USD/JPY pair. That said, some repositioning trade ahead of the BoJ decision could infuse some volatility. Any corrective slide, however, might be seen as an opportunity to initiate fresh bullish positions and is likely to remain limited.

The fundamental backdrop suggests that the path of least resistance for the USD/JPY pair is to the upside. Hence, some follow-through strength, towards reclaiming the key 120.00 psychological mark, remains a distinct possibility. That said, bulls are likely to wait for sustained strength beyond the 119.00 round figure before placing fresh bets.

Technical levels to watch