USD/JPY flat-lines above mid-145.00s, bullish potential remains intact

• USD/JPY retreats a few pips from the daily peak amid a modest USD pullback.
• Retreating US bond yields prompts some profit-taking around the greenback.
• The Fed-BoJ policy divergence might continue to act as a tailwind for the pair.

The USD/JPY pair struggles to capitalize on its modest intraday uptick on Tuesday and retreats a few pips from the vicinity of a 24-year top touched in September. The pair trades near the lower end of its daily range, just above the mid-145.00s and remains at the mercy of the US dollar price dynamics heading into the North American session.

The USD surrenders its early gains to over a one-week high amid a modest pullback in the US Treasury bond yields, which, in turn, acts as a headwind for the USD/JPY pair. That said, growing acceptance that the Fed will continue to tighten its monetary policy at a faster pace to tame inflation should limit the downside for the US bond yields and the greenback.

In fact, the markets are currently pricing in a greater chance of the fourth consecutive supersized 75 bps rate increase at the next FOMC policy meeting in November. The bets were reaffirmed by the robust US monthly jobs report on Friday and the overnight hawkish comments from Fed Vice Chair Lael Brainard, reiterating the US central bank's commitment to bring inflation down.

The Bank of Japan, on the other hand, has been lagging behind other major central banks in the process of policy normalisation. Furthermore, Japan's Prime Minister Fumio Kishida said on Tuesday that the BoJ needs to stick to its ultra-lose policy setting until wages rise. The resultant Fed-BoJ policy divergence could further offer some support to the USD/JPY pair.

Moving ahead, there isn't any relevant market-moving economic data due for release from the US on Tuesday. Hence, traders will take cues from speeches by influential FOMC members. This, along with the US bond yields, will influence the USD price dynamics. Apart from this, the broader risk sentiment could produce short-term trading opportunities around the USD/JPY pair.

Technical levels to watch