USD/JPY hits fresh YTD peak amid stronger US PCE data-led modest USD uptick

• USD/JPY attracts some dip-buying on Friday and climbs to a fresh YTD top in the last hour.
• The USD pares modest intraday losses after stronger US PCE data and acts as a tailwind.
• The Fed-BoJ policy divergence favours bulls and supports prospects for additional gains.

The USD/JPY pair reverses an intraday dip to the 139.50 area and climbs to a fresh YTD peak in reaction to the stronger US PCE Price Index. The pair is currently placed just above the 140.00 psychological mark and seems poised to prolong its recent upward trajectory witnessed over the past two weeks or so.

The US Dollar (USD) reverses a part of its modest intraday profit-taking slide after the US Bureau of Economic Analysis (BEA) reported that the headline PCE Price Index rose 0.4% in April as compared to 0.1% in the previous month. Adding to this, the yearly rate accelerated to 4.4% against expectations for a fall to 3.9% from 4.2% in March. Additional details revealed that the Core PCE Price Index – the Fed’s preferred inflation gauge – edged higher to 4.7% from 4.6%, beating consensus estimates.

The data reaffirmed market expectations that the Federal Reserve (Fed) will keep interest rates higher for longer, which, in turn, lends some support to the Greenback and acts as a tailwind for the USD/JPY pair. In fact, the markets are now pricing in over a 50% chance of another 25 bps lift-off at the June FOMC meeting. This is reinforced by a fresh leg up in the US Treasury bond yields, widening the US-Japan rate differential and contributing to driving flows away from the Japanese Yen (JPY).

Apart from this, a more dovish stance adopted by the Bank of Japan (BoJ) might continue to undermine the JPY and suggests that the path of least resistance for the USD/JPY pair is to the upside. Even from a technical perspective, the emergence of some dip-buying on Friday and acceptance above the 140.00 mark add credence to the constructive setup. Hence, some follow-through strength towards the next relevant hurdle, around the 140.45-140.50 region, looks like a distinct possibility.

Technical levels to watch