USD/JPY holds steady above mid-138.00s, upside remains capped amid softer USD

• USD/JPY lacks any firm direction and seesaws between tepid gains/minor losses on Wednesday.
• Sluggish US bond yields keep the USD bulls on the defensive and act as a headwind for the pair.
• The Fed-BoJ policy divergence continues to lend support ahead of US data and Powell’s speech.

The USD/JPY pair struggles to capitalize on its modest intraday uptick on Wednesday and faces rejection near the 139.00 mark. Spot prices drop to a fresh daily low during the early European session, though manage to bounce back above mid-138.00s in the last hour.

The US Dollar remains on the defensive amid a modest downtick in the US Treasury bond yields and turns out to be a key factor acting as a headwind for the USD/JPY pair. Despite the recent hawkish remarks by Federal Reserve policymakers, investors seem convinced that the US central bank will slow the pace of its policy tightening. In fact, the markets have fully priced in a relatively smaller 50 bps Fed rate hike in December, which, in turn, is seen exerting pressure on the US bond yields and the greenback.

Apart from this, worries about the worsening COVID-19 situation drive some haven flows towards the Japanese Yen and contributes to capping the USD/JPY pair. The downside, however, remains cushioned amid a more dovish stance adopted by the Bank of Japan (BoJ), which continues to undermine the JPY. In fact, BoJ Governor Haruhiko Kuroda said earlier this month that the central bank will stick to its monetary easing to support the economy and achieve the 2% inflation target in a stable fashion. In contrast, the Fed is widely expected to continue to raise borrowing costs to combat stubbornly high inflation.

Hence, the market focus will remain glued to Fed Chair Jerome Powell's scheduled speech, which will be scrutinized for clues about future rate hikes. This will play a key role in influencing the USD price dynamics and provide some meaningful impetus to the USD/JPY pair ahead of the key US jobs data (NFP) on Friday. In the meantime, traders on Wednesday will take cues from the release of the US ADP report, Prelim US Q3 GDP report and JOLTS Job Openings data. This, along with the US bond yields and the broader risk sentiment, should allow traders to grab short-term opportunities around the major.

Technical levels to watch