USD/JPY holds steady near daily high, bulls looking to seize back control near 115.75 area

• USD/JPY attracted some buying on Monday and stalled its recent pullback from a multi-year high.
• A generally positive risk tone undermined the safe-haven JPY and extended support to the major.
• Fed rate hike bets, elevated US bond yields revived the USD demand and provided a modest lift.

The USD/JPY pair maintained its bid tone through the early European session and was last seen hovering just a few pips below the daily high, around 115.75 region.

A combination of supporting factors assisted the USD/JPY pair to attract fresh buying near mid-115.00s on Monday and stall its recent pullback from a five-year top touched last week. A generally positive tone around the equity markets undermined the safe-haven Japanese yen and acted as a tailwind for the major. Bulls further took cues from elevated US Treasury bond yields, which helped revive the US dollar demand amid growing acceptance for a faster policy tightening by the Fed.

The disappointment from the headline NFP print, showing that the economy added only 199K jobs in December, was largely offset by a larger drop in the unemployment rate to 3.9%. Adding to this, wages reported another month of strong growth and reinforced market bets for an eventual Fed lift-off in March. This, in turn, led to a fresh leg up in the US Treasury bond yields. In fact, the yield on the benchmark 10-year Treasury note shot to 1.80% or the highest level since January 2020.

Conversely, the 10-year JGB yield remained near zero due to the Bank of Japan's yield curve control policy. This resulted in a further widening of the US-Japanese yield differential, which was seen as another factor that extended some support to the USD/JPY pair. Nevertheless, the fundamental backdrop seems tilted firmly in favour of bullish traders. A subsequent move beyond the 116.00 mark will reaffirm the positive outlook and set the stage for the resumption of the recent up-trend.

In the absence of any major market-moving economic releases from the US, the US bond yields will continue to play a key role in influencing the USD price dynamics. Apart from this, traders might take cues from the broader market risk sentiment to grab some short-term opportunities around the USD/JPY pair. The key focus, however, remains on Fed Chair Jerome Powell's testimony on Tuesday, which will be followed by the release of the latest US consumer inflation figures on Wednesday.

Technical levels to watch