USD/JPY struggles for direction, holds steady around 114.00 mark

• USD/JPY struggled to preserve/capitalize on its modest intraday gains on Friday.
• A subdued USD price action turned out to be a key factor that capped the upside.
• Signs of stability in the equity markets, elevated US bond yields extended support.

The USD/JPY pair held on to its modest intraday gains heading into the European session, albeit lacked follow-through and was last seen trading around the 114.00 mark.

The pair built on the overnight bounce from one-week lows and gained some traction during the early part of the trading action on Friday. Reports that China Evergrande made funds available for a bond coupon to a trustee account helped ease concerns about a credit crunch in China's real estate sector. This, in turn, undermined the safe-haven Japanese yen and acted as a tailwind for the USD/JPY pair.

On the other hand, the US dollar, so far, has struggled to capitalize on the previous day's goodish rebound from three-week lows. This was seen as a key factor that failed to provide any additional boost to the USD/JPY pair and capped the early uptick near the 114.20 area. The downside, however, remains cushioned amid a further widening of the US-Japanese government bond yield differential.

In fact, the yield on the benchmark 10-year US government bond rose to 1.683%, or the highest level since May 13 on Thursday amid expectations for an early policy tightening by the Fed. The speculations were reinforced by comments from Fed Governor Christopher Waller, saying that the US central bank may have to act faster if inflation continues to run high through the remainder of this year.

Conversely, the yield on the 10-year Japanese government bond remained near zero due to the Bank of Japan's yield curve control policy. This warrants some caution for aggressive bearish traders and before positioning for any extension of the recent pullback from near four-year tops touched earlier this week.

Market participants now look forward to the release of flash US PMIs for a fresh impetus later during the early North American session. This, along with the US bond yields, will influence the USD price dynamics. Traders will further take cues from the broader market risk sentiment for some short-term opportunities around the USD/JPY pair.

Technical levels to watch