USD/JPY climbs to over one-week tops, eyeing a move beyond 112.00 ahead of NFP

• USD/JPY added to the previous day’s positive move and gained follow-through traction on Friday.
• The widening of US-Japanese bond yield differential/risk-on mood weighed on the safe-haven JPY.
• Hawkish Fed expectations continued underpinning the USD and remained supportive ahead of NFP.

The USD/JPY pair climbed to over one-week tops during the early European session, with bulls now awaiting a move beyond the 112.00 mark.

A combination of factors assisted the USD/JPY pair to build on the previous day's positive move and gain some follow-through traction for the second consecutive session on Friday. The prevalent risk-on mood continued weighing on the safe-haven Japanese yen, which was further weighed down by the widening of the US-Japanese government bond yield differential.

Investors cheered a potential deal to avoid a default on the US government debt, which was evident from a classic risk-on move in the equity markets. In fact, the Senate voted 50-48 to extend the debt ceiling until early December. The bill will now be sent to the House of Representatives for approval before it can be sent to President Joe Biden for his signature.

Meanwhile, the US Treasury bond yields extended their strong rally that has been underway since late September when the Fed signalled that it would begin tapering its bond purchases by the end of 2021. On the other hand, the yield on the 10-year Japanese government bond remained near zero due to the Bank of Japan's yield curve control policy.

The markets also seem to have started pricing in the possibility of a Fed rate hike move in 2022 amid worries that the recent surge in crude oil/energy prices will stoke inflation. The combination of factors continued acting as a tailwind for the US dollar, which was seen as another factor that contributed to the bid tone surrounding the USD/JPY pair.

Market participants now await the release of the closely-watched US monthly jobs report (NFP), due later during the early North American session. The data will influence market expectations about the likely timing of the Fed's tapering plan. This will play a key role in influencing the USD in the near term and provide a fresh directional impetus to the USD/JPY pair.

Technical levels to watch