USD/JPY clings to gains near 128.00 mark, upside remains capped amid risk-off

• USD/JPY gained traction for the second straight day amid resurgent USD demand.
• The risk-off impulse benefitted the safe-haven JPY and capped gains for the major.
• The mixed fundamental backdrop warrants caution before placing fresh bullish bets.

The USD/JPY pair built on the previous day's positive move and gained some follow-through traction for the second successive day on Tuesday. The pair held on to its modest intraday gains through the first half of the European session and was last seen trading around the 128.00 mark, just a few pips below a near two-week high.

The US dollar made a solid comeback from over a one-month low touched on Monday amid a sharp spike in the US Treasury bond yields, bolstered by comments from Fed Governor Christopher Waller. Speaking at an event in Frankfurt, Waller backed a 50 bps rate hike for several meetings until inflation eases back toward the central bank’s goal. This, in turn, was seen as a key factor that acted as a tailwind for the USD/JPY pair.

That said, the worsening global economic outlook benefitted the safe-haven Japanese yen and capped the upside for the USD/JPY pair. Investors remain sceptical that central banks can hike interest rates to curb inflation without impacting economic growth. The worries were further fueled by the official Chinese PMIs, showing that business activity in both manufacturing and services sectors remained in contraction territory in May.

This, along with concerns that the global supply chain disruption would push consumer prices even higher, tempered investors' appetite for riskier assets. This was evident from a sea of red across the global equity markets, which, in turn, forced investors to take refuge in traditional safe-haven assets. The mixed fundamental backdrop warrants some caution for bullish traders and positioning for any further gains.

Market participants now look forward to the release of the Conference Board's US Consumer Confidence Index for some impetus later during the early North American session. This, along with the US bond yields, will influence the USD price dynamics. 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