• USD/JPY gained traction for the third straight day and was supported by a combination of factors.
  • The intraday USD buying interest picked up pace after stronger than expected PCE inflation data.
  • The prevalent risk-on mood undermined the safe-haven JPY and remained supportive of the move.

The USD/JPY pair finally broke out of its intraday trading range and shot to the highest level since April 6, around the 110.20 region in the last hour.

A combination of factors assisted the pair to build on this week’s positive move and continue scaling higher for the third consecutive session on Friday. Following the previous day’s brief pause, the US dollar regained traction amid speculations that risking inflation pressures will force the Fed to tighten its monetary policy sooner rather than later.

The higher inflation narrative was validated by stronger Personal Consumption Expenditures (PCE) Price Index data. In fact, the Fed’s preferred inflation gauge – the Core PCE Price Index – surpassed market expectations and jumped to 3.1% in April from 1.9%. This marked the highest reading since 1994 and further validated the higher inflation narrative.

Apart from this, the risk-on rally across the global equity markets continued undermining the safe-haven Japanese yen and contributed to the USD/JPY pair’s positive move. The already upbeat market mood got an additional boost from growing optimism over the economic recovery amid reports about the Biden administration’s multi-trillion fiscal spending plan.

Meanwhile, the strong move up could further be attributed to some technical buying on a sustained move beyond the key 110.00 psychological mark. With technical indicators still far from being in the overbought territory, the USD/JPY pair now seems poised to climb further to the 110.70-75 intermediate resistance en-route YTD tops, just ahead of the 111.00 mark.

Technical levels to watch

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