The pair is heading towards another blowout month, gaining more than 5% at the time of writing, boosted by the stark policy divergence between the two central banks.
The US Federal Reserve is on an aggressive and front loaded tightening path, having delivered a 75 basis point rate hike earlier in the month, which was the largest increase in nearly thirty years. The move came as a response to the resurgence of headline CPI inflation to the highest levels since 1981 in May.
The Bank of Japan on the other hand, is getting isolated since it maintained its expansionary policy, although it did make a rare – albeit soft - FX reference. It also continues to step into the market to defend the upper limit JGB yields.
All this, in spite of Japan's CPI (excluding fresh food), being above the 2% target as of April. Speaking yesterday at the 92nd Annual General Meeting of the Bank of International Settlements (BIS), Governor Kuroda attributed this rise mostly to the "international energy price increase". 
He also noted that Japan has not been that affected by the global inflationary trend and reiterated the bank's commitment to the stimulatory stance, saying that "monetary policy will continue to be accommodative".
In the aftermath of the recent policy decisions by the Fed and the BoJ, USD/JPY had extended its rally to the highest levels in nearly 24 years, before easing. The stark policy differential continues to be the main source of strength and bulls seem poised to break fresh ground, by taking out 136.92, although moves to 139.29 and beyond may not come easy.
On the other hand, USD/JPY is soft today and it would not be surprising for month-end flows to work against it, given the massive rise so far. This could lead to a test of 134.26, but a strong catalyst will be required for a steeper decline that would challenge the EMA200 and the broader 132.35-131.35 region.
Markets brace for another inflation update form the US on Thursday and Q1 GDP today, while Fed Chair Powell speaks later in the day, at the European Central Bank's Forum in Sintra.
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
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