USD/JPY holds steady below 129.00 mark, up a little amid modest USD strength

• USD/JPY edges higher on Tuesday, albeit lacks follow-through beyond the 129.00 mark.
• A combination of factors underpins the JPY and keeps a lid on any upside for the major.
• The downside seems cushioned amid a firmer USD and ahead of the BoJ on Wednesday.

The USD/JPY pair builds on the overnight bounce from its lowest level since late May and edges higher for the second successive day on Tuesday. Spot prices, however, retreat a few pips from the daily top and remain below the 129.00 mark through the first half of the European session.

The Japanese Yen continues to draw support from speculations that the Bank of Japan (BoJ) will tweak the yield control policy again at its meeting on Wednesday. Apart from this, a softer risk tone further benefits the JPY's relative safe-haven status and contributes to capping the upside for the USD/JPY pair. The downside, however, remains cushioned, at least for the time being, amid some follow-through US Dollar buying.

A goodish intraday pickup in the US Treasury bond yields assists the USD to build on the previous day's recovery from a seven-month low, which, in turn, lends some support to the USD/JPY pair. That said, the prospects for a less aggressive policy tightening by the Fed could act as a headwind for the US bond yields and the greenback. Investors seem convinced that the Fed will soften its hawkish stance amid easing inflationary pressures.

In fact, the markets are currently pricing in a greater chance of a smaller 25 bps Fed rate hike move in February. The bets were lifted by the US consumer inflation figures released last week, which showed that the headline CPI fell for the first time in more than 2-1/2 years in December. This, in turn, warrants some caution before placing aggressive bullish bets around the USD/JPY pair and positioning for any further gains.

Traders might also prefer to wait on the sidelines ahead of the highly-anticipated BoJ monetary policy decision. Heading into the key central bank event risk, the release of the Empire State Manufacturing Index, due later during the early North American session, along with the US bond yields, could drive the USD demand. Apart from this, the broader risk sentiment might produce short-term opportunities around the USD/JPY pair.

Technical levels to watch