USD/JPY trades with modest gains, lacks follow-through beyond mid-130.00s

• USD/JPY edges higher on Wednesday, though the modest intraday uptick lacks bullish conviction.
• Bets for smaller Fed rate hikes continue to weigh on the USD and act as a headwind for the pair.
• Hawkish BoJ expectations, recession fears benefit the safe-haven JPY and contribute to capping gains.

The USD/JPY pair attracts some buyers near the 130.00 psychological mark on Wednesday and reverses a part of the previous day's modest losses. Spot prices, however, seem to struggle to capitalize on the move and held steady around the mid-130.00s through the early European session.

The US Dollar remains on the defensive near a nine-month low, which, in turn, is seen as a key factor acting as a headwind for the USD/JPY pair. The markets now seem convinced that the Fed will soften its hawkish stance amid signs of easing inflationary pressures and have been pricing in a smaller 25 bps rate hike in February. This keeps a lid on the recent recovery in the US Treasury bond yields and continues to weigh on the greenback.

The Japanese Yen (JPY), on the other hand, draws support from fresh speculation that high inflation may invite a more hawkish stance from the Bank of Japan (BoJ) later this year. The bets were lifted after the latest CPI report from Japan showed that consumer inflation rose to a 41-year high level of 4% in December. Apart from this, worries about a deeper global economic downturn benefit the safe-haven JPY and contribute to capping the USD/JPY pair.

The aforementioned fundamental backdrop favours bearish traders and suggests that the path of least resistance for the USD/JPY pair is to the downside. The downside, however, seems cushioned as traders might prefer to move to the sidelines ahead of this week's important US macro releases, including the Advance Q4 GDP print and the Core PCE Price Index. The focus will then shift to the highly-anticipated FOMC monetary policy meeting, scheduled next week.

In the meantime, the US bond yields will play a key role in influencing the USD price dynamics in the absence of any relevant market-moving economic data from the US. Apart from this, traders will take cues from the broader risk sentiment to grab short-term opportunities around the USD/JPY pair.

Technical levels to watch