USD/JPY sticks to modest gains around 116.00, lacks follow-through as focus remains on NFP

• A positive risk tone undermined the safe-haven JPY and assisted USD/JPY to gain traction on Friday.
• Retreating US bond yields kept the USD bulls on the defensive and kept a lid on any further gains.
• Investors now look forward to the closely-watched US NFP report for some meaningful impetus.

The USD/JPY pair traded with a mild positive bias heading into the European session, albeit seemed struggling to capitalize on the move beyond the 116.00 mark.

The pair attracted some buying on Friday and reversed a part of the previous day's losses amid a generally positive risk tone, which tends to undermine the safe-haven Japanese yen. That said, retreating US Treasury bond yields kept the US dollar bulls on the defensive and capped the upside for the USD/JPY pair, at least for the time being.

Investors also preferred to wait and see if the US jobs data due later this Friday would reinforce the need for faster policy tightening by the Fed. It is worth recalling that the December 14-15 FOMC monetary policy meeting minutes released on Wednesday indicated that the US central bank could hike interest rates earlier than anticipated.

The markets have priced in an 80% chance of a 25 bps Fed hike in March 2022. The speculations were reinforced by the overnight comments by St. Louis Fed James Bullard and San Francisco Fed President Mary Daly. The big shift in the policymakers' tone should continue to act as a tailwind for the US bond yields and lend support to the greenback.

The fundamental backdrop favours bullish traders and supports prospects for a further near-term appreciating move. A stronger NFP print will reaffirm the positive outlook and set the stage for the resumption of the USD/JPY pair's recent run-up to a five-year high, around the 116.35 region touched on the first day of the current week.

Apart from this, traders will take cues from developments surrounding the coronavirus saga. This, along with the broader market risk sentiment, will influence demand for the safe-haven JPY and produce some short-term opportunities around the USD/JPY pair.

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