USD/JPY hits fresh multi-week high, lacks follow-through amid softer risk tone

• USD/JPY regains positive traction on Wednesday amid the emergence of fresh USD buying.
• Bets for more Fed rate hikes push the US bond yields higher and help revive the USD demand.
• A weaker risk tone could undermine the safe-haven JPY and cap any further gains for the pair.

The USD/JPY pair once again shows some resilience below the 134.00 round-figure mark for the second straight day and attracts fresh buyers on Wednesday. The intraday positive move picks up pace during the early European session and lifts spot prices to a nearly three-week high, around the 134.75 region in the last hour, though lacks follow-through.

A further rise in the US Treasury bond yields helps revive the US Dollar (USD) demand, which, in turn, is seen as a key factor acting as a tailwind for the USD/JPY pair. In fact, the yield on the two-year US Treasury note and the benchmark 10-year US government bond climb to over a four-week high amid speculations that the Federal Reserve (Fed) will continue raising interest rates. The bets were lifted by the hawkish remarks by Fed officials.

In fact, Fed Governor Christopher Waller said on Friday that a year of aggressive rate hikes "haven't made much progress" in returning inflation to their 2% target and the central bank still needs to move rates higher. Adding to this, St. Louis Fed President James Bullard, in an interview on Tuesday, backed the case for additional 75 bps of tightening against the market consensus for one more 25 bp hike next month and then the potential for cuts later this year.

Adding to this, the incoming positive US macro data pointed to a resilient economy and fueled concerns that the Fed may have more work to do, which, in turn, remains supportive of elevated US Treasury bond yields. This results in the widening of the US-Japan rate differential. Apart from this, the Bank of Japan's (BoJ) dovish stance undermines the Japanese Yen (JPY) and pushes the USD/JPY pair higher, though the risk-off impulse could cap gains.

The prospects for further policy tightening by the Fed fuel worries about economic headwinds stemming from rising borrowing costs. This, in turn, tempers investors' appetite for riskier assets, which is evident from a fresh leg down in the equity markets and tends to benefit traditional safe-haven currencies, including the JPY. Hence, it will be prudent to wait for some follow-through buying before positioning for any further appreciating move.

Technical levels to watch