USD/JPY jumps to four-day high amid risk-on, upside potential seems limited

• The risk-on mood undermined the safe-haven JPY and assisted USD/JPY to gain positive traction.
• The upside seems limited amid the prevalent USD selling bias, warranting some caution for bulls.
• The Fed’s expected rate hike path and the recent slump in the US bond yields weighed on the USD.

The USD/JPY pair gained some positive traction on Monday and broke out of a multi-day-old trading range amid the risk-on mood, which tends to undermine the safe-haven Japanese yen. The intraday buying interest picked up pace during the early North American session and lifted spot prices to a four-day high, around the 127.80-127.85 region.

Investors turned optimistic amid hopes that the easing of COVID-19 lockdowns in China could boost the global economy, which was evident from a generally positive tone around the equity markets. Apart from this, a big divergence in the monetary policy stance adopted by the Fed and the Bank of Japan weighed on the JPY and lifted the USD/JPY pair.

That said, the prevalent US dollar selling bias might hold back traders from placing aggressive bullish bets and keep a lid on any further gains for the USD/JPY pair. Traders continue to cut their long US dollar positions amid speculations that the Fed Fed could pause the rate hike cycle after two 50 bps hikes each in June and July.

The prospects for an eventual slowdown of the Fed's policy tightening was evident from the recent slump in the US Treasury bond yields to a multi-week high. This might act as a headwind for the greenback and cap any meaningful upside for the USD/JPY pair amid relatively lighter trading volumes on the back of the  Memorial Day holiday in the US.

Investors might also prefer to wait on the sidelines ahead of important US macro releases scheduled at the beginning of a new month, including the closely watched US monthly jobs report (NFP) on Friday. Hence, it will be prudent to wait for strong follow-through buying before confirming that the USD/JPY pair has formed a strong near-term base.

Technical levels to watch