USD/JPY trades with modest gains amid positive risk tone, modest USD uptick

• USD/JPY gains traction on Friday and moves away from over a one-week low set the previous day.
• The Fed-BoJ policy divergence and a positive risk tone undermine the JPY and act as a tailwind.
• The recent hawkish remarks by Fed officials help revive the USD demand and remain supportive.

The USD/JPY pair builds on the previous day's goodish recovery move from the 131.75-131.70 area, or a one-and-half-week low and gains some positive traction on Friday. The pair maintains its bid tone through the early part of the European session and is currently placed just below mid-133.00s.

A combination of factors undermine the Japanese yen and act as a tailwind for the USD/JPY pair amid a modest pickup in the US dollar demand. The overnight sharp spike in the US Treasury bond yields widens the US-Japan rate differential, which, along with a positive risk tone, weighs on the safe-haven JPY. Apart from this, a big divergence in the monetary policy stance adopted by the Bank of Japan and the Federal Reserve offers additional support to the major.

In fact, the BoJ has repeatedly said that it will stick to its ultra-easy policy settings. In contrast, the recent hawkish comments by several Fed officials indicated that the US central bank remains on track to tighten its monetary policy further. San Francisco Fed President Mary Daly, St. Louis Fed President James Bullard, Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari this week backed the case for additional interest rate hikes.

That said, signs of easing inflationary pressures in the US might have forced investors to trim bets for a 75 Fed rate hike at the September policy meeting. The US CPI report on Wednesday revealed that consumer prices were unchanged in July. Furthermore, the US Producer Price Index unexpectedly fell in July for the first time in two years, suggesting that inflation may have peaked. This, in turn, raises uncertainty over the size of the next rate hike by the Fed.

Nevertheless, the US central bank is still expected to raise its benchmark interest rates by at least 50 bps in September. Adding to this, the emergence of fresh buying on Thuesday supports prospects for a further near-term appreciating move for the USD/JPY pair. Market participants now look forward to the Preliminary Michigan US Consumer Sentiment Index. This, along with the US bond yields and the broader risk sentiment might provide some impetus to the major.

Technical levels to watch