USD/JPY recovers modest intraday losses, retakes 135.00 amid risk-on/rising US bond yields

• A combination of factors assisted USD/JPY to attract some buying near the 134.35 area on Friday.
• The risk-on impulse, widening of the US-Japan yield differential weighed on the safe-haven JPY.
• The Fed-BoJ policy divergence suggests that the pullback from a 24-year high has run its course.

The USD/JPY pair attracted some buying near the 134.35 region on Friday and recovered over 85 pips from the daily low. Spot price climbed back above the 135.00 psychological mark during the mid-European session, though lacked any follow-through buying.

A significant decline in commodity prices this week seems to have eased fears about the persistent rise in inflationary pressures and boosted investors' sentiment. This, in turn, triggered a risk-on rally, which was evident from the strong rally across the global equity markets and dented demand for traditional safe-haven assets, including the Japanese yen.

A goodish recovery in the global risk sentiment allowed the US Treasury bond yields to rebound from nearly a two-week low touched on Thursday. This resulted in the widening of the gap between the US-Japanese bond yields, which, along with a big divergence in the monetary policy stance adopted by the Bank of Japan and the Fed further undermined the JPY.

It is worth recalling that the BoJ last week decided to maintain the massive stimulus programme and vowed to defend the 0.25% cap for the 10-year JGB yield to support a still-fragile economy. In contrast, the Fed remains on track to retain its policy tightening path and is expected to hike interest rates again by 75 bps in July to curb soaring inflation.

Fed Chair Jerome Powell, during his second day of Congressional testimony on Thursday, reaffirmed market bets and stressed an unconditional commitment to taming inflation, even amid risks to growth. This, in turn, favours the USD bulls, though speculations that any further depreciation of the JPY might force some form of practical intervention might cap the USD/JPY pair. 

Market participants now look forward to a scheduled speech by St. Louis Fed President James Bullard. Traders will further take cues from the US economic data - the revised Michigan Consumer Sentiment Index and New Home Sales. This, along with the US bond yields, the USD price dynamics and the broader risk sentiment should provide some impetus to the USD/JPY pair.

Technical levels to watch