USD/JPY sits near 15-month tops, just below mid-111.00s ahead of US data

• A combination of factors assisted USD/JPY to gain traction for the second consecutive day.
• Hawkish Fed expectations, rebounding US bond yields remained supportive of the move.
• The risk-on environment undermined the safe-haven JPY and provided an additional boost.

The USD/JPY pair shot to fresh 15-month tops, around the 111.60-65 region during the mid-European session, albeit quickly retreated few pips thereafter. The pair was last seen trading around the 111.40 region, still up over 0.25% for the day.

The pair built on the previous day's strong positive move and gained some follow-through traction for the second consecutive session on Thursday. The momentum pushed the USD/JPY pair to the highest level since March 2020 and was sponsored by a combination of factors.

The underlying bullish tone in the financial markets – as depicted by an extended rally in the global equity markets – continued undermining demand for the safe-haven Japanese yen. Bullish traders further took cues from a strong pickup in the US Treasury bond yields.

Meanwhile, a subdued US dollar demand did little to provide an additional boost, rather kept a lid on any further gains for the USD/JPY pair, at least for now. That said, the Fed's surprise hawkish shift acted as a tailwind for the USD and supports prospects for additional gains.

It is worth recalling that policymakers brought forward the timetable for the first post-pandemic interest rate hikes and signalled two rate hikes by the end of 2023. The market expectations were cemented by the overnight hawkish comments by Dallas Fed President Robert Kaplan.

In an interview with Bloomberg TV, Kaplan noted that they are seeing a broadening of price pressures and would prefer to taper sooner than the end of the year. Hence, the key focus will remain on Friday's release of the US jobs report (NFP), which could influence the Fed's policy outlook.

In the meantime, Thursday's US economic docket – featuring the release of the Initial Weekly Jobless Claims and ISM Manufacturing PMI – will be looked upon for a fresh impetus. Apart from this, the US bond yields and the broader market risk sentiment might produce some trading opportunities.

Technical levels to watch