USD/JPY sticks to modest recovery gains around 136.30-35 region, lacks follow-through

• USD/JPY edged higher on Monday amid the emergence of some USD buying.
• Recession fears underpinned the safe-haven JPY and capped gains for the pair.
• The downside seems limited as the focus remains on the key FOMC decision.

The USD/JPY pair attracted some buying near the 136.00 mark during the Asian session on Monday, though struggled to capitalize on the move. The pair has now retreated a few pips from the daily low and was last seen trading with only modest intraday gains, around the 136.30-136.35 region.

The US dollar edged higher on the first day of a new week amid a modest uptick in the US Treasury bond yields. This, in turn, offered some support to the USD/JPY pair, though a combination of factors held back bulls from placing aggressive bets and kept a lid on any meaningful upside.

The market worries about a global economic downturn were further fueled by the disappointing release of the flash PMI prints from the Eurozone and the US on Friday. This continued weighing on investors' sentiment, which underpinned the safe-haven Japanese yen and capped the USD/JPY pair.

The global flight to safety, along with expectations that a US recession might force the Fed to slow its policy tightening, has led to the recent sharp fall in the US Treasury bond yields. This resulted in the narrowing of the US-Japan rate differential and further benefitted the JPY.

The US central bank, however, is universally expected to hike interest rates by another 75 bps, which might continue to act as a tailwind for the USD. Hence, the market focus will remain glued to the outcome of a two-day FOMC policy meeting, scheduled to be announced on Wednesday.

In the meantime, the divergent Fed-Bank of Japan policy stance should limit the downside for the USD/JPY pair. In fact, the BoJ stuck to its ultra-easy policy settings last week and committed to continue buying the Japanese Government Bonds (JGB) at an annual pace of around ¥80 trillion.

Heading into the key event risk, the US bond yields will play a key role in influencing the USD price dynamics amid absent relevant market-moving economic releases. Apart from this, the broader market risk sentiment could provide some trading impetus to the USD/JPY pair.

Technical levels to watch