The Japanese yen continues its decline against the US dollar, prompting increased intervention threats from Japanese authorities. However, it seems that the lure of quick gains has overridden any prevailing fears. Carry traders are once again actively increasing their long positions on the USD/JPY pair. But how far are they willing to push it?

Alluring dollar vs. waning yen

Last week, it became crystal clear to traders that neither the US Federal Reserve nor the Bank of Japan have any intention of deviating from their current monetary policies anytime soon.

At its September meeting, the US central bank refrained from hiking rates but signaled the possibility of another tightening round this year.

Persistent inflation remains the Fed's primary concern, and with the US economy showing remarkable resilience despite aggressive Fed policies, fears of a recession seem to be in the rearview mirror.

Japan, on the other hand, has not fully recovered from the pandemic. At the BOJ's September meeting, Kazuo Ueda openly acknowledged the shaky economic recovery, emphasizing the need to continue with an ultra-loose monetary policy.

The BOJ lacks substantial reasons to start normalizing its monetary policy, especially from an inflation standpoint. Despite the core CPI being above the BOJ's 2% target for 17 consecutive months, the regulator still perceives price growth as unstable.

Clearly, the Fed and the BOJ remain on opposite monetary spectrums, which has been fueling the ascent of the USD/JPY pair. Since the beginning of the week, the pair has surged by over 0.7% and is currently trading at multi-month highs.

Yesterday, USD/JPY soared to its highest level since last December at 149.71. A key driver behind the dollar's surge against the yen was the spike in yields on 10-year US Treasury bonds.

Last Wednesday, they touched a 16-year peak of 4.462%, backed by hawkish market sentiments regarding the US central bank's future monetary policy.

The burning question for forex traders is whether the US Federal Reserve will initiate another rate hike this year. Comments from FOMC members this week have bolstered the hopes of dollar bulls.

All officials who spoke were remarkably unanimous in their sentiment, not ruling out the possibility of an additional tightening round this year. The most hawkish of them all was Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, who commented on the continuous signs of economic growth in the US, suggesting another potential rate hike on the horizon.

Today, all eyes are on the speech by Jerome Powell, Chairman of the US Federal Reserve, who is expected to address revised Q2 GDP figures.

Should the fresh data exceed prior estimates and economist forecasts, it could inspire a more hawkish tone from Powell, likely sparking another rally in US Treasury yields.

"The rise in US bond yields is a potent driver for USD/JPY. This factor can lead to heightened volatility in the pair, even amidst potential Japanese intervention risks," shared Dane Chekhov, currency strategist at Nordea Bank.

Alvin Tan at RBC Capital Markets shares this viewpoint. He believes that the fundamental upward pressure on USD/JPY from US government bond yields is too significant for traders to ignore.

"Most market participants understand that even if Japanese authorities intervene at this point, it is unlikely to lead to a long-term decline in USD/JPY. For the pair to lose its bullish momentum, we'd need a reversal in the upward trend of 10-year US Treasury yields, which doesn't seem likely soon," noted Tan.

Many analysts anticipate the prospect of additional rate hikes in the US to boost US Treasury yields next month, fostering further dollar growth across the board, including its pairing with the yen.

MUFG analysts forecast that USD/JPY, fueled by the surge in US bond yields, will breach the critical level of 150, after which Japanese authorities might intervene by buying the yen.

However, MUFG experts believe that such intervention would only offer short-term relief, as fundamental factors continue to favor the dollar, while the yen remains under dovish pressure from the BOJ.

"A USD decline will only happen once the dust settles, the US economic outlook starts to wane, and the Fed adopts a more dovish approach. This shift will take some time, so I believe the dollar will remain robust until at least the end of 2023. Its weakening might commence in the first half of the following year," commented Keith Jax, an analyst at SocGen.

Technical outlook for USD/JPY

The MACD indicator is currently signaling a strong bullish move for the pair. The MACD line sits above both the central and signal lines, indicating a dominant bullish sentiment in the market.

This upward momentum is further corroborated by the Relative Strength Index (RSI), which remains comfortably above the 50-mark. However, the psychological resistance level at 150.00 could pose a challenge to the pair's continued ascent.

Should buyers manage to break above this threshold, they could easily head for higher targets. In such an event, the bulls' next strategic target would likely be the October high at 151.94.

On the flip side, in a short-term perspective, the USD/JPY asset could encounter significant support levels. The first noticeable support level currently stands around the 14-day Exponential Moving Average (EMA) at 148.27, followed closely by the level at 148.00.

If the pair breaches below the latter, it would pave a swift path to the round figure of 147.00, from which bears might aim for the 23.6% Fibonacci retracement level at 146.76.