USD/JPY retreats from three-day top, downside seems limited amid modest USD strength

• USD/JPY touches a three-day high on Tuesday, albeit lacks follow-through or bullish conviction.
• Bets for further policy tightening by the Fed underpin the USD and lends support to the pair.
• BoJ Governor Kuroda's comments on exiting the ultra-loose monetary policy cap the upside.

The USD/JPY pair struggles to capitalize on its modest intraday gains and attracts some sellers in the vicinity of mid-137.00s, or a three-day high touched this Tuesday. Spot prices retreat below the 137.00 mark during the first half of the European session, though the downside seems cushioned amid a modest US Dollar strength.

In fact, the USD Index, which measures the greenback's performance against a basket of currencies, is looking to build on the previous day's solid bounce from over a five-month low and acting as a tailwind for the USD/JPY pair. The incoming strong US macro data suggests that the economy remains resilient despite rising borrowing costs and fuel speculations that the Fed may lift interest rates more than projected. This, in turn, is seen as a key factor lending some support to the greenback.

The Japanese Yen, on the other hand, is undermined by dismal domestic data, showing that Japan's real wage posted its biggest fall in more than seven years in October. That said, Bank of Japan (BoJ) Governor Haruhiko Kuroda's comments on exiting the ultra-loose monetary policy helped limit losses for the JPY. Kuroda also acknowledged the upside risk to inflationary pressures, which, in turn, holds back bulls from placing aggressive bets and caps the USD/JPY pair, at least for the time being.

The aforementioned fundamental factors make it prudent to wait for strong follow-through buying before confirming that spot prices have formed a near-term bottom and positioning for any further gains. In the absence of any major market-moving economic releases from the US, traders will take cues from the USD price dynamics. Apart from this, the broader risk sentiment will influence demand for the safe-haven JPY and further contribute to producing short-term opportunities around the USD/JPY pair.

Technical level to watch