USD/JPY extends its consolidative price move below 135.00, downside seems cushioned

• USD/JPY is seen oscillating in a narrow trading band and remains below the YTD top.
• Bets for additional interest rate hikes by the Fed underpin the USD and lend support.
• Traders seem reluctant ahead of BoJ Governor candidate Ueda's testimony on Friday.

The USD/JPY pair struggles to gain any meaningful traction on Thursday and oscillates in a narrow band, just below the 135.00 psychological mark through the first half of the European session. Spot prices, meanwhile, remain well within the striking distance of the YTD peak, around the 135.20-135.25 region set earlier this week.

The US Dollar is seen consolidating its recent gains to a multi-week high, which, in turn, acts as a headwind for the USD/JPY pair. The downside, however, remains cushioned, at least for the time being, amid expectations that the Federal Reserve will continue raising interest rates to tame stubbornly high inflation. In fact, the FOMC minutes released on Wednesday showed that a few members favoured raising the target range for the federal funds rate by 50 bps or they could have supported it.

Adding to this, St. Louis Fed President James Bullard noted the need to get inflation on a sustainable path toward the target this year. This comes after the US CPI and PPI data indicated last week that inflation isn't coming down quite as fast as hoped. Moreover, the US data pointed to an economy that remains resilient despite rising borrowing costs, which should allow the Fed to stick to its hawkish stance. This remains supportive of elevated US Treasury bond yields and lends some support to the Greenback.

Furthermore, a modest recovery in the global risk sentiment, which tends to undermine the safe-haven Japanese Yen (JPY), supports prospects for a further appreciating move for the USD/JPY pair. That said, traders seem reluctant to place aggressive bets and prefer to wait for the Bank of Japan (BoJ) Governor candidate Kazuo Ueda's testimony on Friday.  Ueda's view on the future of yield curve control (YCC) and super-easy monetary policy should drive the JPY and provide a fresh impetus to the pair.

In the meantime, traders on Thursday will take cues from the US economic docket, featuring the release of the Prelim (second estimate) Q4 GDP print and the usual Weekly Initial Jobless Claims. This, along with the US bond yields, will drive the USD demand. Apart from this, the broader risk sentiment should contribute to producing short-term trading opportunities around the USD/JPY pair. Nevertheless, the fundamental backdrop suggests that the path of least resistance for the major is to the upside.

Technical levels to watch