USD/JPY retakes 129.00 mark and beyond amid modest USD strength, positive risk tone

• USD/JPY gains positive traction on Friday and draws support from a combination of factors.
• A further recovery in the US bond yields helps revive the USD demand and acts as a tailwind.
• A positive risk tone undermines the safe-haven JPY and provides an additional lift to the pair.

The USD/JPY pair attracts some buyers on the last day of the week and steadily climbs back above the 129.00 mark during the Asian session. Spot prices, however, remain confined in a familiar range held since the beginning of this week, warranting caution for bullish traders before positioning for any further intraday positive move.

The US Dollar draws some support from a further recovery in the US Treasury bond yields and turns out to be a key factor acting as a tailwind for the USD/JPY pair. In fact, the yield on the benchmark 10-year US government bond move away from its lowest level since mid-September touched on Thursday amid uncertainty over the Fed's rate-hike path.

In fact, the markets have been pricing in a greater chance of a smaller 25 bps Fed rate hike move in February. That said, the upbeat US macro data released on Thursday, along with the recent hawkish rhetoric from several Fed officials, suggest that borrowing costs are likely to remain elevated for longer, which, in turn, favours the USD bulls.

Apart from this, a generally positive tone around the equity markets undermines the safe-haven Japanese Yen and lends support to the USD/JPY pair. Investors turn optimism over a recovery in the world's second-largest economy after the People’s Bank of China (PBoC) kept its benchmark loan prime rate at historic lows for a fifth straight month on Friday.

The upside for the USD/JPY pair, meanwhile, remains capped, at least for the time being, amid fresh speculation that high inflation may invite a more hawkish stance from the Bank of Japan (BoJ) later this year. It is worth recalling that the BoJ earlier this week decided to leave its monetary policy settings unchanged, defying expectations for more hawkish signals.

Nevertheless, the fundamental backdrop supports prospects for some meaningful upside for the USD/JPY pair, though the lack of a strong follow-through buying warrants caution. Market participants now look to the US Existing Homes Sales data, which, along with speeches by influential FOMC members, will drive the USD and provide some impetus to the USD/JPY pair.

Technical levels to watch