AUD/JPY climbs as risk appetite improves, BoJ decision looms

• AUD/JPY trades above 94.00 as improved risk sentiment and stronger-than-expected China Retail Sales support the Aussie.
• The Bank of Japan is expected to hold its rates at 0.50% on Tuesday, which could support the strength of AUD/JPY.
• The Australian Dollar remains firm on diverging policy outlooks between the RBA and BoJ.

AUD/JPY is trading firmer on Monday, supported by improved risk sentiment and diverging policy outlooks between the Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ).

The pair is holding near 94.46 at the time of writing, up over 1% on the day, extending gains as investors shift capital into higher-yielding currencies, driven by diverging monetary policy outlooks and an increase in risk sentiment.

Investor risk appetite improved after alleged diplomatic overtures from Iran via Gulf intermediaries, signaling a potential interest in easing tensions with Israel. While no truce or formal agreement has been reached, the reports helped improve market sentiment.

As a result, demand for safe-haven currencies like the Japanese Yen (JPY) waned, while the Australian Dollar (AUD) found support from stronger May Retail Sales in China.

Traders are also watching the BoJ policy decision on Tuesday, where the central bank is widely expected to hold rates at 0.5% and may provide updated guidance on the pace of tapering its government bond purchases.

With the RBA maintaining a relatively hawkish bias, monetary policy divergence continues to favor the upside for AUD/JPY.

AUD/JPY surges above 94.00

AUD/JPY is trading higher on Monday, holding near 94.46 at the time of writing. After rebounding off the 50-day Simple Moving Average (SMA) at 92.42, the pair has moved above the midpoint of the November-April decline, at 94.23.

A Morning Star reversal pattern, a three-candlestick pattern that often signals a bullish trend reversal, has formed above the 38.2% Fibonacci retracement at 92.30, highlighting a shift in momentum following last week's pullback.

Immediate resistance is located at 94.23. A close above this level could pave the way toward 96.16, which marks the 61.8% Fibonacci retracement, followed by the psychological barrier at 97.00.

On the downside, initial support is seen at 92.30, aligning with both the Morning Star base and the 38.2% Fibonacci level. Below that, the 23.6% retracement at 89.91 offers deeper support, with the March low at 86.05 marking a critical downside target if bearish pressure returns.

AUD/JPY daily chart

Meanwhile, the Relative Strength Index (RSI) on the daily timeframe is nearing 60, turning higher without breaching overbought territory. 

This suggests that bullish momentum is building but still has room to extend before entering exhaustion, as the RSI is not yet in overbought territory, indicating potential for further upward movement.