USD/JPY recovers modest intraday losses, flat-lined below 124.00 mark

• USD/JPY attracted dip-buying near the 123.45 area on Thursday, though lacked follow-through.
• The risk-off mood benefitted the safe-haven JPY and capped gains amid retreating US bond yields.
• The Fed-BoJ policy divergence favours bullish traders and supports prospects for additional gains.

The USD/JPY pair recovered its modest intraday losses and climbed back closer to the daily high, around the 123.75-123.80 region during the early European session.

Having struggled to find acceptance above the 124.00 round-figure mark, the USD/JPY pair witnessed some selling on Thursday and was pressured by a combination of factors. The prevalent cautious market mood drove some haven flows towards the Japanese yen and exerted some downward pressure on spot prices amid a softer tone surrounding the US dollar. Bearish traders further took cues from retreating US Treasury bond yields, which kept a lid on the recent USD rally to a nearly two-year high.

That said, a combination of factors extended some support and assisted the USD/JPY pair to attract some dip-buying near the 123.45 region. Bank of Japan board member Asahi Noguchi said that the central bank must maintain its ultra-easy monetary policy, even as rising commodity prices are expected to push inflation higher. Conversely, the March 15-16 FOMC policy meeting minutes released on Wednesday showed that policymakers were prepared to hike interest rates by 50 bps at upcoming meetings.

The minutes also showed general agreement about reducing the central bank’s massive balance sheet at a maximum pace of $95 billion per month to tighten financial conditions. The resultant Fed-BoJ policy divergence should support prospects for a further near-term appreciating move for the USD/JPY pair. Even from a technical perspective, the recent move up witnessed over the past one week or so has been along an ascending channel, which further points to a well-established short-term uptrend.

Sustained strength beyond the 124.00 round-figure mark will reaffirm the constructive outlook and allow the USD/JPY pair to build on its gains recorded over the past four trading sessions. Bulls might then aim back to conquer the 125.00 psychological mark, or the highest level since August 2015 touched in March. Traders now look forward to the US Weekly Initial Jobless Claims data. This, along with the US bond yields, will influence the USD and produce some meaningful trading opportunities.

Technical levels to watch