USD/JPY eases from two-week highs, up little around 114.15-20 area

• USD/JPY edged higher during the Asian session, albeit lacked any follow-through buying.
• A softer risk tone benefitted the safe-haven JPY and capped amid retreating US bond yields.
• Hawkish Fed expectations acted as a tailwind for the USD and continued lending support.

The USD/JPY pair struggled to capitalize on its Asian session uptick to over two-week highs and was last seen trading in the neutral territory, around the 114.15-20 region.

The pair built on the previous day's positive move from the 113.75 area and gained some follow-through traction during the early part of the trading action on Tuesday. However, a combination of factors held back bullish traders from placing aggressive bets and kept a lid on any meaningful upside for the USD/JPY pair, at least for now.

The prevalent cautious mood – as depicted by a softer tone around the equity markets – benefitted the safe-haven Japanese yen and acted as a headwind for the USD/JPY pair. Apart from this, retreating US Treasury bond yields further collaborate to cap gains, though a strong bullish sentiment surrounding the US dollar extended some support.

The USD stood tall near 16-month highs touched in the previous session amid firming expectations for an early policy tightening by the Fed. In fact, the markets have been pricing in the possibility for an eventual Fed rate hike move by July 2022 and the Fed funds futures indicate a high likelihood of another raise by November next year.

The fundamental backdrop seems tilted in favour of bullish traders. However, the lack of any strong follow-through buying warrants some caution before positioning for any further appreciating move. Market participants now look forward to the US monthly Retail Sales data, due later during the early North American session for a fresh impetus.

This, along with the US bond yields, will influence the USD price dynamics. Apart from this, the broader market risk sentiment might further contribute to producing some short-term trading opportunities around the USD/JPY pair.

Technical levels to watch