USD/JPY returns intraday gains and remains near multi-month lows hit this Monday

• USD/JPY is rebounding from the nearly nine-month low reached on Monday.
• The recovery of the dollar turns out to be a key factor that offers support to the pair.
• The rise is limited pending the decision of the BoJ.

The USD/JPY recovers from its lowest level since late May at 127.21 and breaks a two-day losing streak. However, the pair pulls back a few pips from the daily high and returns below the 128.00 zone in the middle of the European session.

The US dollar is bouncing after hitting a 7-month low, which in turn is seen as a key factor offering some support for the USD/JPY pair. The USD intraday rally, meanwhile, lacks an obvious fundamental catalyst and remains constrained amid increasingly firm expectations of less aggressive Fed tightening. In fact, markets are now pricing in a smaller 25 basis point hike in February and expect the US central bank to pause its rate hike cycle, possibly after the March FOMC meeting.

Speculation was fueled by the latest consumer inflation figures released last week, which showed the headline CPI fell in December for the first time in more than two and a half years. This should stop any significant rise in the dollar. Besides, the Japanese yen continues to be supported by expectations that the Bank of Japan (BoJ) will further tighten its yield control policywhich in turn helps limit the USD/JPY recovery attempt.

Traders also seem reluctant, preferring to stay out ahead of the BoJ’s policy decision, which will be announced during the Asian session on Wednesday. Ahead of the key central bank appointment, US markets will be closed on Monday for Martin Luther King Jr. Day. This makes it prudent to wait for strong continuation buying before confirming that the USD/JPY pair has formed a bottom in the short term and position yourself for any significant recovery.

USD/JPY technical levels