USD/JPY hits fresh YTD top around 145.20, lacks follow-through amid intervention fears

• USD/JPY climbs to its highest level since November 2022, albeit lacks follow-through.
• The Fed-BoJ policy divergence continues to act as a tailwind and remains supportive.
• Intervention fears hold back bulls from placing fresh bets and caps gains for the major.

The USD/JPY pair kicks off the new week on a positive note and touches a fresh YTD peak during the Asian session. Spot prices, however, retreat a few pips in the last hour and now seem to have stabilized around the 145.00 psychological mark.

The US Dollar (USD) climbs to a fresh peak since July 7 and continues to draw support from rising bets for further tightening by the Federal Reserve (Fed), which, in turn, is seen as a key factor acting as a tailwind for the USD/JPY pair. The fact that the consumer inflation in the US remains well above the central bank’s 2% target, along with worries that rising energy costs will push up the Consumer Price Index (CPI), keeps the door open for one more 25 bps lift-off by the end of this year.

Adding to this, a slightly bigger rise in the US Producer Price Index (PPI) in July remains supportive of a further rise in the US Treasury bond yields and validates the hawkish Fed expectations. This marks a big divergence in comparison to a more dovish stance adopted by the Bank of Japan (BoJ), which is the only central bank in the world to maintain a negative benchmark interest rate, and suggests that the path of least resistance for the USD/JPY pair remains to the upside.

It is worth recalling that the BoJ took steps in July to make the Yield Curve Control (YCC) policy more flexible and allow yield on the 10-year Japanese government bond to move up toward 1% has failed to lend support to the domestic currency. Policymakers, however, have stressed that the policy adjustment was a technical tweak aimed at extending the shelf life of stimulus. Moreover, weaker Japanese wage data reaffirmed bets that the BoJ will maintain ultra-low interest rates.

Bullish traders, however, remain on guard in the wake of expectations for jawboning/intervention by Japanese authorities. This, in turn, warrants some caution before positioning for any further appreciating move. The fundamental backdrop, meanwhile, suggests that any meaningful corrective decline might still be seen as a buying opportunity and is more likely to remain cushioned in the absence of any relevant market-moving economic releases, either from Japan or the US on Monday.

Technical levels to watch