USD/JPY pares intraday gains amid modest USD weakness, holds just above mid-128.00s

• USD/JPY gained some positive traction on Friday and recovered further from a two-week low.
• The risk-on impulse undermined the JPY and extended support amid rebounding US bond yields.
• Modest USD pullback from a two-decade high kept a lid on any meaningful upside for the major.

The USD/JPY pair retreated nearly 75 pips from the daily high and was seen trading with only modest gains, near the 128.65-128.70 region during the early European session.

A combination of supporting factors assisted the USD/JPY pair to gain some positive traction on Friday and built on the overnight bounce from mid-127.00s, or over a two-week low. A goodish recovery in the equity markets undermined the safe-haven Japanese yen, which, along with rebounding US Treasury bond yields acted as a tailwind for spot prices.

That said, modest US dollar pullback from a two-decade high held back bulls from placing aggressive bets around the USD/JPY pair, rather attracted some selling near the 129.35 region. Given that at least 50 bps Fed rate hike move at the June meeting is fully priced in the markets, traders opted to take some profits off their USD bullish position.

Meanwhile, Fed chair Jerome Powell reaffirmed on Thursday that the central bank is ready to raise interest rates by 50 bps at each of the next two policy meetings. Powell further pledged that the Fed was prepared to do more to curb soaring inflation. This should help limit any meaningful downside for the buck and offer some support to the USD/JPY pair.

Market participants now look forward to the release of the prelim Michigan Consumer Sentiment Index from the US, due later during the early North American session. Apart from this, the US bond yields, might influence the USD and provide some impetus to the USD/JPY pair. Traders will further take cues from broader market risk sentiment to grab short-term opportunities.

Technical levels to watch