USD/JPY clings to gains near YTD peak, seems poised to appreciate further

• USD/JPY touches a fresh YTD top on Tuesday and is supported by a combination of factors.
• Hawkish Fed expectations, elevated US bond yields continue to underpin the Greenback.
• The incoming BoJ Governor Ueda’s dovish remarks weigh on the JPY and remain supportive.
• Looming recession risks benefit the JPY’s safe-haven status and might cap gains for the pair.

The USD/JPY pair catches fresh bids following the previous day's brief pause and climbs to a fresh YTD top during the first half of the European session on Tuesday. The pair is currently placed around the 136.65-136.70 area and seems poised to prolong its upward trajectory witnessed since the beginning of this month.

A fresh leg up in the US Treasury bond yields, bolstered by hawkish Fed expectations, helps revive the US Dollar demand, which, in turn, acts as a tailwind for the USD/JPY pair. The markets seem convinced that the US central bank will continue to tighten its monetary policy to bring inflation down back to the 2% target. The bets were reaffirmed by the stronger US PCE Price Index last week, which indicated that inflation isn't coming down quite as fast as hoped. This remains supportive of elevated US bond yields and lends some support to the Greenback.

The Japanese Yen (JPY), on the other hand, is weighed down by the overnight dovish remarks from the incoming Bank of Japan (BoJ) Governor Kazuo Ueda. Addressing the upper house of the parliament, Ueda said that the benefits of the BoJ's stimulus outweigh its side effects. He also stressed the need to maintain the ultra-loose policy to support the fragile economy and reinforced that the BoJ isn't seeking a quick move away from a decade of massive easing. This, in turn, is seen as another factor that provides an additional lift to the USD/JPY pair.

That said, a generally softer risk tone benefits the JPY's relative safe-haven status and keeps a lid on any further gains for the major, at least for the time being. The market sentiment remains fragile amid worries about economic headwinds stemming from rising borrowing costs and geopolitical tensions. Nevertheless, the fundamental backdrop suggests that the path of least resistance for the USD/JPY pair is to the upside. Bulls, however, might wait for some follow-through buying beyond the 137.00 mark before placing fresh bets and positioning for further gains.

Technical levels to watch