USD/JPY sits near daily high, around mid-136.00s amid risk-on/rebounding US bond yields

• A combination of factors weighed on the JPY and assisted USD/JPY to gain traction on Monday.
• The widening US-Japan yield differential, the risk-on impulse undermined the safe-haven JPY.
• The USD languished near a two-week low and capped gains as the focus remains on the FOMC.

The USD/JPY pair attracted some buying near the 136.00 mark on the first day of a new week and reversed a part of Friday's losses to a two-week low. The pair, for now, seems to have snapped a two-day losing streak, though the intraday uptick lacked bullish conviction.

A goodish recovery in the global risk sentiment - as depicted by an intraday rally in the equity markets - undermined the safe-haven Japanese yen. The risk-on flow pushed the US Treasury bond yields higher and widened the US-Japan rate differential. This was seen as another factor that weighed on the JPY and extended some support to the USD/JPY pair.

That said, the emergence of fresh US dollar selling held back bulls from placing aggressive bets and kept a lid on any meaningful gains for the USD/JPY pair. The USD struggled to capitalize/preserve its modest intraday gains and languished near its lowest level since July 5, which, in turn, was seen as a key factor that acted as a headwind for spot prices.

The USD downfall, however, remained limited, at least for the time being, amid bets that the Fed would hike interest rates by another 75 bps at the end of a two-day meeting on Wednesday. In contrast, the Bank of Japan stuck to its ultra-easy policy settings last week and reiterated its commitment to continue buying the Japanese Government Bonds (JGB).

The big divergence in the monetary policy stance adopted by the two major central banks favours bullish trades and supports prospects for a further near-term appreciating move for the USD/JPY pair. Hence, any meaningful pullback might still be seen as a buying opportunity and is more likely to be short-lived ahead of the key central bank event risk.

Technical levels to watch