USD/JPY struggles for a firm direction, stuck in a range around 138.00 mark

• A combination of diverging forces failed to provide any meaningful impetus to USD/JPY on Wednesday
• Diminishing odds for a 100 bps Fed rate hike in July weighed on the USD and acted as a headwind.
• The Fed-BoJ policy divergence helped limit deeper losses ahead of the BoJ decision on Thursday.

The USD/JPY pair struggled to capitalize on the previous day's goodish bounce from the 137.40-137.35 region and witnessed subdued/range-bound price action on Wednesday. The pair seesawed between tepid gains/minor losses through the early European session and was last seen trading just above the 138.00 round-figure mark.

The US dollar remained depressed for the fourth successive day and languished near a two-week low amid receding bets for a more aggressive rate hike by the Federal Reserve in July. In fact, several FOMC members signalled last week that they will likely stick to a 75 bps rate increase at the upcoming policy meeting on July 26-27. This, in turn, was seen as a key factor that acted as a headwind for the USD/JPY pair.

Investors, however, seem convinced that the recent surge in US inflation to a four-decade high would force the Fed to deliver a larger rate hike later this year. The speculations remained supportive of elevated US Treasury bond yields, which could help the USD to stall its recent corrective slide from a two-decade high. Traders might also refrain from placing bearish bets amid expectations for a more dovish Bank of Japan.

The BoJ has repeatedly said that it would stick to the ultra-loose monetary policy and ease further as necessary. The divergent Fed-BoJ policy stance supports prospects for the emergence of some dip-buying around the USD/JPY pair and an extension of the recent strong bullish run. That said, traders seemed reluctant and would prefer to wait on the sidelines ahead of the BoJ monetary policy decision, due to be announced on Thursday.

In the meantime, a generally positive risk tone could undermine the safe-haven Japanese yen and offer some support to the USD/JPY pair. Market participants now look forward to the release of the US Existing Home Sales data for some impetus later during the early North American session. Apart from this, the US bond yields and the broader market risk sentiment could allow traders to grab short-term opportunities.

Technical levels to watch