USD/JPY surrenders a major part of intraday gains amid a turnaround in risk sentiment

• USD/JPY gained traction for the second straight day, though the intraday uptick ran out of steam.
• A turnaround in the risk sentiment benefitted the safe-haven JPY and capped the upside for the pair.
• The Fed-BoJ policy divergence should limit the downside ahead of the FOMC minutes on Wednesday.

The USD/JPY pair struggled to capitalize on the intraday positive move and met with some supply near the 136.35 region on Tuesday. Spot prices surrendered a major part of the early gains and retreated to the 135.70-135.65 region during the first half of the European session.

The initial optimism led by reports that US president Joe Biden was leaning toward a decision to ease tariffs on goods from China faded rather quickly amid the worsening economic outlook. Investors remain concerned that rapidly rising interest rates and tightening financial conditions would pose challenges to global economic growth. Apart from this, the ongoing Russia-Ukraine war and the COVID-19 outbreak in China have been fueling recession fears. This, in turn, led to a fresh leg down in the equity markets, which offered some support to the safe-haven Japanese yen.

The anti-risk flow dragged the US Treasury bond yields back closer to a multi-week low touched on Friday, narrowing the US-Japan rate differential. This was seen as another factor that benefitted the JPY and acted as a headwind for the USD/JPY pair. The downside, however, remains cushioned amid the divergent monetary policy stance adopted by the Bank of Japan (BoJ) and the Federal Reserve. It is worth recalling that the BoJ has repeatedly signalled that it would stick to its ultra-accommodative policy and pledged to keep borrowing costs at "present or lower" levels.

In contrast, Fed Chair Jerome Powell last week reaffirmed bets for more aggressive rate hikes and said that the US economy is well-positioned to handle tighter policy. Hence, the market focus will remain glued to the FOMC meeting minutes on Wednesday. Apart from this, Friday's release of the closely-watched US monthly jobs report (NFP) will play a key role in influencing the near-term USD price dynamics. This, in turn, should help determine the next leg of a directional move for the USD/JPY pair. In the meantime, traders might refrain from placing aggressive bets.

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