USD/JPY keeps the red but holds above 135.00 mark, focus remains on FOMC minutes

• USD/JPY edged lower on Wednesday, though lacked any follow-through selling.
• The USD surged to a fresh 20-year high and extended some support to the pair.
• A positive risk tone undermined the safe-haven JPY and also helped limit losses.
• Traders keenly await the FOMC meeting minutes before placing directional bets.

The USD/JPY pair struggled to capitalize on its modest gains recorded over the past two sessions and witnessed some selling on Wednesday. The pair maintained its offered tone through the early North American session and was last seen trading near the daily low, around the 135.00 psychological mark.

The recent sharp decline in the US Treasury bond yields resulted in the narrowing of the US-Japan rate differential. This, along with growing recession fears, offered support to the safe-haven Japanese yen 
and exerted some downward pressure on the USD/JPY pair. The downtick could further be attributed to some repositioning trade ahead of the crucial FOMC meeting minutes, due later during the US session.

Fed Chair Jerome Powell reiterated last week that the US central bank remains focused on getting inflation under control and said the US economy is well-positioned to handle tighter policy. This, in turn, lifted bets for more aggressive rate hikes and continued lending support to the US dollar. Hence, investors will look for clues about the Fed's policy tightening path before placing fresh bets.

In the meantime, an extension of the recent strong USD bullish run to a fresh two-decade high should act as a tailwind for the USD/JPY pair amid signs of stability in the financial markets. Apart from this, a big divergence in the policy stance adopted by the Fed and the Bank of Japan supports prospects for the emergence of some dip-buying. This, in turn, warrants caution for bearish traders.

Technical levels to watch