USD/JPY Breaks Out to Fresh Highs as Fed and BOJ Decisions Loom

The USD/JPY currency pair has broken out of its symmetrical triangle formation, reaching fresh multi-decade highs. The rally was anticipated last week and is now facing a crucial test: can higher energy prices and widening policy divergence propel it through the key level of 164? The Federal Reserve's interest rate decision on Wednesday will be a major event for USD/JPY traders, with no change in rates expected but significant implications for market expectations. Governor Kazuo Ueda's press conference following the BOJ's policy decision will also be closely watched for insights into Japan's inflation outlook and economic growth prospects.

The recent rebound in energy prices has added to domestic inflation pressures and worsened Japan's terms of trade, creating another headwind for the yen.

Traders are also bracing for key releases on US inflation, growth, and labour market data, which could generate volatility and impact USD/JPY. The advance estimate of second-quarter GDP is due on Thursday, while personal income, spending, and core PCE deflator figures will be released on the same day.

Friday's Employment Cost Index (ECI) reading and US earnings season, headlined by results from Microsoft, Meta, and Amazon, are also potential market movers. The AI hyperscalers' recent weakness has sparked concerns about a broader risk-off move and carry trade unwind risks.

The momentum indicators continue to favour upside for USD/JPY, with the RSI (14) sitting at 72 and the MACD remaining above its signal line in positive territory. However, both indicators began to roll over into Friday's close, suggesting buyers no longer have the same momentum behind them as they did earlier in the week.

Immediate resistance for USD/JPY is found at 164, while on the downside, 163.65 and 163.24 are key technical levels for bulls to defend. A convincing break above 164 would bring the big figure of 165 into view, should the broader uptrend extend further as favoured.