USD/JPY consolidates around 135.00 mark, downside potential seems limited

• USD/JPY gained some positive traction on Monday, though lacked any strong follow-through buying.
• The risk-on mood undermined the safe-haven JPY and extended support amid rising US bond yields.
• Upbeat US Durable Goods Orders failed to impress the USD bulls or provide any impetus to the pair.

The USD/JPY pair attracted some dip-buying on the first day of a new week and rallied over 100 pips from the daily swing low, around mid-134.00s. Spot prices shot to a two-day high during the early North American session, though seemed struggling to capitalize on the move amid modest US dollar weakness.

The greenback did attract some buying following the release of upbeat US Durable Goods Orders, which unexpectedly rose by 0.7% in May. Adding to this, orders excluding transportation items also surpassed estimates and recorded a growth of 0.7% during the reported month. That said, reducing odds for more aggressive Fed rate hikes kept the USD bulls on the defensive and acted as a headwind for the USD/JPY pair, at least for the time being.

The fundamental backdrop, however, supports prospects for the resumption of the recent strong bullish run to a 24-year peak touched. The recent sharp decline in commodity prices eased fears about a further rise in inflationary pressures and boosted investors' confidence. This was evident from a generally positive tone around the equity markets, which might continue to undermine the safe-haven Japanese yen and act as a tailwind for the USD/JPY pair.

The risk-on impulse pushed the US Treasury bond yields and resulted in the widening of the US-Japan yield differential. Apart from this, a big divergence in the policy stance adopted by the Bank of Japan (dovish) and the Federal Reserve (hawkish) favours bullish traders. Hence, any meaningful pullback could be seen as a buying opportunity and is more likely to remain limited ahead of Fed Chair Jerome Powell's appearance on Thursday.

Technical levels to watch