USD/JPY refreshes daily high and retreats, flat-lined below 135.00 mark

• USD/JPY struggles to gain any meaningful traction and remains confined in a narrow band.
• The Fed-BoJ policy divergence acts as a tailwind amid a goodish pickup in the US bond yields.
• Recession fears offer support to the safe-haven JPY and cap gains amid modest USD weakness.

The USD/JPY pair refreshes its daily high during the early North American session, though the uptick seems lacking any strong follow-through buying. The pair quickly retreats a few pips and slips back below the 135.00 psychological mark in the last hour.

A big 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 the recent hawkish remarks by several FOMC officials, Friday’s upbeat US jobs data fueled speculations that the US central bank would stick to its aggressive policy tightening path. In contrast, the  BoJ has repeatedly said that it will stick to its ultra-easy policy settings and its commitment to keep the 10-year Japanese government bond yield around 0%.

Apart from this, a goodish pickup in the US Treasury bond yields widens the US-Japan yield differential and undermines the JPY, offering additional support to the USD/JPY pair. That said, a modest US dollar weakness is holding back bulls from placing aggressive bets and capping gains for the major. 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 USD lower for the second successive day amid some repositioning trade ahead of the crucial US CPI report, scheduled for release on Wednesday.

In the meantime, the prevalent cautious market mood is offering some support to the safe-haven JPY and further contributing to capping gains for the USD/JPY pair. The market sentiment remains fragile amid growing worries about a global economic downturn. This, along with US-China tensions over Taiwan, keep investors on edge. Given that there isn’t any major market-moving economic data due for release from the US, the USD/JPY pair seems more likely to prolong its sideways consolidative price moves.

Technical levels to watch