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  • USD/JPY was seen consolidating its recent gains to the highest level since April 9.
  • The overnight surge in the US bond yields extended some support to the greenback.
  • The upbeat market mood undermined the safe-haven JPY and remained supportive.
  • Bulls turn cautious and eye the Fed’s preferred inflation gauge for a fresh impetus.

The USD/JPY pair now seems to have entered a bullish consolidation phase and was seen oscillating in a narrow band, just below the key 110.00 psychological mark.

The pair struggled to capitalize on this week’s positive move to the highest level since April 9 and witnessed a subdued/range-bound price action on the last trading day of the week. Investors now seemed reluctant and refrained from placing fresh bets ahead of another read on the US inflation due later during the early North American session.

In the meantime, a combination of factors acted as a tailwind for the USD/JPY pair and helped limit any meaningful pullback, at least for the time being. The overnight sharp rise in the US Treasury bond yields – triggered by reports about the Biden administration’s multi-trillion spending plan – helped to put a tentative floor under the US dollar.

According to the New York Times, President Joe Biden will seek $6 trillion in U.S. federal spending for the 2022 fiscal year. This further fueled worries about rising inflationary pressures, which might force the Fed to act faster and tighten its monetary policy sooner rather than later and extended some additional support to the greenback.

Meanwhile, the latest development further boosted the already strong global risk sentiment. This was evident from an extended rally in the equity markets, which undermined demand for the safe-haven Japanese yen and did little to inspire bearish traders or prompt any selling around the USD/JPY pair, at least for the time being.

The US Bureau of Economic Analysis is scheduled to release the Fed’s preferred inflation gauge – the core PCE Price Index later this Friday. A stronger print will validate the higher inflation narrative and revive fears for an earlier than anticipated Fed lift-off. This might be enough to provide a fresh lift to the USD/JPY pair.

That said, investors might wait for evidence that the spike in prices is sustained, suggesting that the immediate market reaction might turn out to be short-lived. Nevertheless, the near-term bias seems tilted in favour of bullish traders and supports prospects for an extension of the positive move witnessed since the early part of this week.

Technical levels to watch