- USD/JPY struggles to gain significant traction and remains confined to a tight range.
- The policy divergence between the Fed and the Bank of Japan acts as a tailwind amid a nice rally in US bond yields.
- Recession fears offer support to the safe-haven yen and cap gains amid modest dollar weakness.
The pair USD/JPY it updates its daily high during the beginning of the American session, although the rally seems to lack a strong buying following. The pair quickly pulls back a few pips and drops back below the key psychological level 135.00 in the last hour.
A wide divergence in the monetary policy stance adopted by the Federal Reserve and the Bank of Japan continues to weigh on the Japanese yen, which, in turn, offers some support to the USD/JPY pair. Against the backdrop of recent statements from several FOMC officials, Friday’s upbeat US employment data fueled speculation that the US central bank would maintain its aggressive policy tightening. In contrast, the Bank of Japan has repeatedly stated that it will maintain its ultra-soft policy and its commitment to keep the 10-year Japanese government bond yield around 0%.
Aside from this, a nice rally in US Treasury yields widens the US-Japan yield spread and undermines the Yen, offering additional support to the USD/JPY pair. That being said, modest US dollar weakness is preventing bulls from making aggressive bets and limiting the pair’s gains. The New York Fed’s monthly survey showed that inflation in the US may have peaked last month. This turns out to be a key factor dragging the dollar lower for the second day in a row, amid some repositioning trades ahead of the crucial US CPI report due on Wednesday.
Meanwhile, the prevailing cautious mood in the market is offering some support to the safe-haven JPY and helping to limit USD/JPY gains. Market sentiment remains fragile amid growing concerns about a global economic slowdown. This, along with tensions between the US and China over Taiwan, keep investors on their toes. With no major US economic data to be released, the USD/JPY pair looks more likely to continue its consolidating sideways moves.
Technical levels
Source: Fx Street
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