USD/JPY spikes back closer to mid-129.00s, lacks follow-through buying

• USD/JPY attracted some dip-buying on Monday amid fading safe-haven demand.
• Sliding US bond yields kept the USD bulls on the defensive and capped the upside.
• The Fed-BoJ policy divergence supports prospects for additional near-term gains.

The USD/JPY pair rallied around 60-65 pips during the early European session and shot back closer to the top end of its daily trading range, around mid-129.00s in the last hour.

The pair attracted some dip-buying near the 128.70 region on Monday and turned positive for the second straight day, with bulls now looking to build on last week's goodish rebound from mid-127.00s. Signs of stability in the financial markets undermined the safe-haven Japanese yen and acted as a tailwind for the USD/JPY pair. That said, a combination of factors held back bulls from placing aggressive bets and capped spot prices.

Investors now seem worried about softening global growth amid the prospects of a more aggressive move by major central banks, the war in Ukraine and China's zero-COVID-19 policy. The fears were further fueled by shockingly weaker Chinese macro data. This, along with geopolitical tensions, extended some support to traditional safe-haven assets. This, in turn, saw the benchmark 10-year yields retreat from the recent peak of 3.20%, which kept the US dollar bulls on the defensive and kept a lid on any meaningful gains for the USD/JPY pair.

Nevertheless, the fundamental backdrop supports prospects for the resumption of the recent appreciating move amid a big divergence in the monetary policy stance adopted by the Fed and the Bank of Japan. Market participants now look forward to the US Empire Manufacturing PMI for a fresh impetus later during the early North American session. This, along with the US bond yields and the broader risk sentiment, should allow traders to grab some short-term opportunities around the USD/JPY pair.

Technical levels to watch