USD/JPY remains confined in a range, consolidates around 135.00 amid modest USD weakness

• USD/JPY extended its sideways/consolidative price move for the second straight day on Tuesday.
• The Fed-BoJ policy divergence, the risk-on impulse undermined the JPY and extended support.
• Modest USD weakness held back bulls from placing fresh bets and capped the upside for the pair.

The USD/JPY pair struggle to gain any meaningful traction and remained confined in a narrow trading band, around the 135.00 psychological mark through the early European session on Tuesday. This subdued price action for the second successive day marks a consolidation phase following the recent strong bullish run to a 24-year high touched last week.

The widening Japan-US interest rate differential, along with the risk-on impulse, undermined the safe-haven Japanese yen and acted as a tailwind for the USD/JPY pair. It is worth recalling that the Bank of Japan (BoJ) on Friday decided to leave its ultra-easy monetary policy settings unchanged and reiterated its guidance to keep borrowing costs at "present or lower" levels. The Japanese central bank also pledged to guide the 10-year yield to around 0%.

In contrast, the Fed last week delivered the biggest hike since 1994 and indicated a faster policy tightening path to tame surging inflation. Moreover, the Fed's so-called dot plot showed that the median year-end projection for the federal funds rate moved up to 3.4% from 1.9% in the March estimate and 3.8% in 2023. This led to a fresh leg up in the US Treasury bond yields, which was seen as another factor lending support to the USD/JPY pair.

The fundamental backdrop favours bullish traders, though modest US dollar weakness kept a lid on any meaningful upside for the USD/JPY pair, at least for the time being. Even from a technical perspective, the USD/JPY pair, so far, has been struggling to make it through the 135.50-135.60 resistance zone. This makes it prudent to wait for strong follow-through buying before positioning for any further near-term appreciating move.

Market participants now look forward to the US economic docket, featuring the release of Existing Home Sales later during the early North American session. This, along with the US bond yields, might influence the USD price dynamics and provide some impetus to the USD/JPY pair. Traders will further take cues from the broader market risk sentiment to grab short-term opportunities.

Key levels to watch

Sustained strength beyond the 135.50-135.60 area would be seen as a fresh trigger for bulls and allow the USD/JPY pair to reclaim the 136.00 round-figure mark for the first time since 1998. The subsequent move up has the potential to lift spot prices towards the next relevant hurdle near the mid-136.00s.

On the flip side, the overnight swing low, around mid-134.00s now seems to protect the immediate downside ahead of the 134.30-134.20 horizontal support. This is closely followed by the 134.00 round figure, which if broken decisively might prompt aggressive long-unwinding trade around the USD/JPY pair.