USD/JPY steadily climbs closer to 139.00 mark, upside potential seems limited

• USD/JPY edges higher on Tuesday, albeit lacks any follow-through buying or bullish conviction.
• Bets that the Fed will soon end its rate-hiking cycle continue to weigh on the USD and cap gains.
• Speculations that BoJ will tweak its YCC policy underpin the JPY and further act as a headwind.

The USD/JPY pair attracts some buying during the Asian session on Tuesday and steadily climbs back closer to the 139.00 mark, albeit lacks follow-through and remains confined well within the previous day's broader trading range.

A turnaround in the global risk sentiment - as depicted by the overnight rally in the US equity markets - undermines the safe-haven Japanese Yen (JPY) and acts as a tailwind for the USD/JPY pair. The upside, however, remains capped in the wake of the underlying bearish sentiment surrounding the US Dollar (USD), which continues to be weighed down by firming expectations that the Federal Reserve (Fed) will soften its hawkish stance.

Investors now seem convinced that the US central bank is nearing the end of its policy tightening cycle and will keep interest rates steady for the rest of the year following the anticipated 25 bps lift-off in July. The bets were reaffirmed by the incoming US macro data, which pointed to a further moderation in consumer inflation, which led to the recent decline in the US Treasury bond yields and keeps the USD bulls on the defensive.

The JPY, on the other hand, continues to draw some support from speculations that the Bank of Japan (BoJ) could adjust its Yield Curve Control (YCC) policy as soon as this month. In fact, Japanese media reported that the BoJ is likely to raise its FY2023 inflation forecast, which has exceeded the 2% goal for more than a year and should put pressure on the central bank to start unwinding its ultra-loose monetary policy settings.

Apart from this, worries about a global economic downturn, fueled by weaker Chinese GDP print on Monday - should limit losses for the safe-haven JPY and contribute to capping gains for the USD/JPY pair. This makes it prudent to wait for strong follow-through buying before confirming that spot prices have formed a near-term bottom and positioning for any meaningful recovery from a two-month low touched last Friday.

Market participants now look forward to the US economic docket, featuring the release of monthly Retail Sales and Industrial Production figures later during the early North American session. This, along with the US bond yields, might influence the USD price dynamics and provide some impetus to the USD/JPY pair. Apart from this, the broader risk setniment should contribute to producing short-term opportunities.

Technical levels to watch