USD/JPY sticks to modest gains near 114.00 mark ahead of US data

• USD/JPY edged higher for the second successive day, though lacked any follow-through.
• The risk-on mood undermined the safe-haven JPY and remained supportive of the move.
• Retreating US bond yields weighed on the USD and kept a lid on any meaningful gains.

The USD/JPY pair maintained its bid tone heading into the North American session, albeit struggled to find acceptance or build on the momentum beyond the 114.00 mark.

The pair built on the overnight rebound from the 113.40 area, marking ascending trend-line support extending from September swing lows, and gained some follow-through traction on Tuesday. This marked the second successive day of a positive move and was sponsored by the prevalent risk-on mood, which tends to undermine the safe-haven Japanese yen.

The uptick, however, lacked bullish conviction amid the emergence of fresh selling around the US dollar, weighed down by an extension of the recent decline in the US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond has now dropped closer to the 1.60% threshold, though hawkish Fed expectations should act as a tailwind.

The Fed chair Jerome Powell reaffirmed on Friday that the US central bank remains on track to begin tapering its bond purchases by the end of this year. The markets have also been pricing in the possibility of a potential interest rate hike in 2022 amid worries that the recent widespread rally in commodity prices will stoke inflation.

The fundamental backdrop seems tilted in favour of bullish trades and supports prospects for additional gains. That said, investors are likely to refrain from placing aggressive bets ahead of Thursday's Bank of Japan policy meeting and the Advance US Q3 GDP report. This, in turn, warrants some caution for aggressive bullish traders.

Market participants now look forward to the US economic docket, featuring the releases of the Conference Board’s Confidence Index, Richmond Manufacturing Index and New Home Sales. This, along with the US bond yields and the broader market risk sentiment, should assist traders to grab some short-term opportunities around the USD/JPY pair.

Technical levels to watch