- The Fed-BoJ policy divergence pushed USD/JPY to a fresh 20-year high on Tuesday.
- Extremely overbought conditions warrant caution before placing fresh bullish bets.
- Investors now eye US housing market data, Fedspeak for some trading opportunities.
The USD/JPY pair maintained its strong bid tone through the first half of the European session and was last seen trading just a few pips below the mid-128.00s, or the highest level in nearly a two-decades.
A combination of factors assisted the USD/JPY pair to prolong its strong bullish trajectory and gain strong follow-through traction for the 13th successive day on Tuesday. A big divergence in the monetary policy stance adopted by the Bank of Japan and the Fed was seen as a key factor behind the recent surge witnessed since the beginning of this month.
The BoJ has been intervening to keep the yield on Japanese 10-year government bonds below 0.25% and repeatedly said to retain its ultra-loose monetary policy. Conversely, the yield on the benchmark 10-year US government bond surged to its highest level since December 2018 amid expectations that the Fed would tighten its monetary policy at a faster pace.
In fact, the markets have been pricing in multiple 50 bps rate hikes by the Fed in the wake of worries that the worsening Ukraine crisis would put upward pressure on already high inflation. This continued to provide support to the US dollar, which provided an additional boost to the USD/JPY pair and remained supportive of the ongoing positive move.
The momentum could further be attributed to some technical buying following the overnight sustained move above the 127.00 round figure. The subsequent strength took along some short-term trading stops placed near the 128.00 mark, setting the stage for additional gains. That said, a combination of factors might hold back bulls from placing fresh bets.
The prospects for a more aggressive Fed response to combat stubbornly high inflation, along with a protracted Russia-Ukraine war, continued weighing on investors' sentiment. This was evident from a softer tone around the equity markets, which tends to benefit the safe-haven JPY. This, in turn, could cap the USD/JPY pair amid extremely overbought conditions.
Market participants now look forward to the US housing market data and a scheduled speech by Chicago Fed President Charles, due later during the early North American session. Apart from this, the US bond yields will influence the USD and provide some impetus to the USD/JPY pair. Traders will further take cues from the broader risk sentiment to grab some short-term opportunities.
Technical levels to watch
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
Gold corrects from record high set at $3,500
Gold price pulls away from the record peak it set at $3,500 earlier in the day as buyers take a breather amid overbought conditions on short-term charts. Any meaningful corrective downfall, however, still seems elusive as US Dollar downtrend remains intact.
EUR/USD retreats below 1.1500 as US Dollar stabilizes
EUR/USD corrects lower following Monday's rally and trades below 1.1500 on Tuesday. The pair loses traction as the US Dollar finds its feet, even as investors remain wary of the US financial stability amid Trump's attacks on Fed Chair Powell. Speeches from ECB and Fed officials are on the radar.
GBP/USD stays below 1.3400 as USD selloff pauses
GBP/USD fluctuates in a tight range below 1.3400 on Tuesday as the modest recovery seen in the US Dollar caps the pair's upside. Nevertheless, the pair's further downside appears limited as fears of a US economic slowdown and concerns about the Fed's independence remain a headwind for the Greenback.
3% of Bitcoin supply in control of firms with BTC on balance sheets: The good, bad and ugly
Bitcoin disappointed traders with lackluster performance in 2025, hitting the $100,000 milestone and consolidating under the milestone thereafter. Bitcoin rallied past $88,000 early on Monday, the dominant token eyes the $90,000 level.
Five fundamentals for the week: Traders confront the trade war, important surveys, key Fed speech Premium
Will the US strike a trade deal with Japan? That would be positive progress. However, recent developments are not that positive, and there's only one certainty: headlines will dominate markets. Fresh US economic data is also of interest.
The Best brokers to trade EUR/USD
SPONSORED Discover the top brokers for trading EUR/USD in 2025. Our list features brokers with competitive spreads, fast execution, and powerful platforms. Whether you're a beginner or an expert, find the right partner to navigate the dynamic Forex market.