USD/JPY climbs back above 135.00 mark, lacks follow-through amid modest USD weakness

• A combination of factors assisted USD/JPY to reverse modest intraday losses on Monday.
• A positive risk tone undermined the safe-haven JPY amid the Fed-BoJ policy divergence.
• Weaker USD failed to inspire bullish traders or provide any additional boost to the major.

The USD/JPY pair attracted some dip-buying on the first day of a new week and has now recovered nearly 60 pips from the daily low, around mid-134.00s. The pair moved back above the 135.00 psychological mark during the early European session and was last seen trading near the top end of its intraday range.

The recent sharp decline in commodity prices helped ease fears about a further rise in inflationary pressures and led to a goodish rebound in the global risk sentiment. This was evident from signs of stability in the financial markets, which undermined the safe-haven Japanese yen and acted as a tailwind for the USD/JPY pair.

The lacklustre demand for safe-haven assets pushed the US Treasury bond yields higher, resulting in the widening of the gap between the US-Japanese bond yields. This, along with a big divergence in the policy stance adopted by the Bank of Japan and the Fed, weighed on the JPY and further extended support to the USD/JPY pair.

That said, modest US dollar weakness held back traders from placing aggressive bullish bets and capped the upside for the USD/JPY pair, at least for the time being. Hopes that inflation is nearing its peak forced investors to reduce bets for more aggressive rate hikes by the Fed, which, in turn, kept the USD bulls on the defensive.

The mixed fundamental backdrop warrants caution before positioning for any firm near-term direction, though the bias still seems tilted in favour of bullish traders. Market participants now look forward to the US economic docket - featuring the release of Durable Goods Orders and Pending Home Sales later during the early North American session.

Apart from this, the US bond yields will influence the USD price dynamics and provide a fresh impetus to the USD/JPY pair. Traders will further take cues from the broader market risk sentiment to grab short-term opportunities around the major.

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