USD/JPY clings to intraday gains, eyes 135.00 mark amid modest USD strength

• USD/JPY catches fresh bids on Tuesday amid the prevalent USD buying interests.
• Hawkish Fed expectations push the US bond yields higher and underpin the buck.
• Recession fears, geopolitical risks benefit the safe-haven JPY and cap the upside.

The USD/JPY pair regains positive traction on Tuesday and maintains its bid tone through the first half of the European session. The pair steadily climbs back closer to the 135.00 psychological mark and moves well within the striking distance of a nearly two-month high touched last Friday.

The US Dollar buying remains unabated amid firming expectations for further policy tightening by the Fed and turns out to be a key factor acting as a tailwind for the USD/JPY pair. In fact, the markets have been pricing in at least a 25 bps lift-off at each of the next two FOMC meetings in March and May in the wake of stubbornly high inflation. This, in turn, triggers a fresh leg up in the US Treasury bond yields and continues to underpin the Greenback.

The Japanese Yen (JPY), on the other hand, is weighed down by the disappointing release of the flash Manufacturing PMI from Japan, which fell more than expected to 47.4 in February. That said, a rise in the service sector activity, along with a generally softer risk tone, lend some support to the safe-haven JPY and cap gains for the USD/JPY pair. The market sentiment remains fragile amid looming recession risks and fresh geopolitical tensions.

In the latest developments, North Korea launched two more ballistic missiles off its east coast on Monday after firing an intercontinental ballistic missile (ICBM) into the sea off Japan's west coast over the weekend. Furthermore, talks of Russia ramping up attacks in Ukraine temper investors' appetite for riskier assets. Traders also seem reluctant ahead of the newly nominated head of the Bank of Japan (BoJ) Governor Kazuo Ueda's testimony on Friday.

In the meantime, the FOMC meeting minutes, due for release on Wednesday, will be looked upon for fresh clues about the US central bank's rate-hike path. This will play a key role in influencing the near-term USD price dynamics and help determine the next leg of a directional move for the USD/JPY pair. Ahead of the key event risks, the flash US PMI prints might produce short-term opportunities later during the early North American session this Tuesday.

Technical levels to watch