USD/JPY struggles to gain any meaningful traction despite risk-on, stuck around 128.00

• USD/JPY attracted buying on Friday and recovered further from the monthly low touched on Thursday.
• The risk-on impulse undermined the safe-haven JPY and extended support amid modest USD strength.
• Recession fears held back bulls from placing aggressive bets and kept a lid on any meaningful gains.

The USD/JPY pair held on to its modest intraday gains and was seen trading near the daily peak, just above the 128.00 mark heading into the North American session.

A combination of supporting factors assisted the USD/JPY pair to attract some buying near the 127.50 region on Friday and build on the overnight bounce from the 127.00 mark, or the monthly low. The People’s Bank of China (PBOC) cut its five-year loan prime rate by 15 basis points to counter an economic slowdown and boosted investors' confidence. This was evident from a solid recovery in the equity markets and undermined the safe-haven Japanese yen. This, along with a goodish pickup in the US dollar demand, acted as a tailwind for the major.

Against the backdrop of expectations for a more aggressive policy tightening by the Fed, the risk-on flow led to modest recovery in the US Treasury bond yields and extended support to the buck. Apart from this, a big divergence in the monetary policy stance adopted by the US central bank and the Bank of Japan offered additional support to the USD/JPY pair. It is worth mentioning that the Bank of Japan has vowed to keep its existing ultra-loose policy settings and promised to conduct unlimited bond purchase operations to defend its near-zero target for 10-year yields.

The fundamental backdrop seems tilted in favour of bullish traders, though the gloomy global economic outlook kept a lid on any meaningful upside for the USD/JPY pair, at least for now. Investors remain concerned that a more aggressive move by major central banks to constrain inflation would pose challenges to the global economy. Adding to this, extended COVID-19 lockdowns in China and the Russia-Ukraine war have been fueling recession fears. This makes it prudent to wait for strong follow-through buying before confirming that the recent corrective slide has run its course.

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 will further take cues from the broader market risk sentiment to grab short-term opportunities around the USD/JPY pair.

Technical levels to watch