USD/JPY bounces off its lowest level since August, upside potential seems limited

• USD/JPY rebounds from its lowest level since August 23 amid a modest USD uptick.
• The Fed’s dovish pivot keeps the US bond yields depressed and should cap the buck.
• Hawkish signals by BoJ member underpins the JPY and acts as a headwind for the pair.

The USD/JPY pair stages a modest bounce from its lowest level since August 23 touched during the early European session on Thursday and climbs back above mid-136.00s in the last hour.

Having shown some resilience below a technically significant 200-day SMA, the US Dollar is attempting a recovery from the vicinity of a multi-month low set on November 15. This turns out to be a key factor that is lending some support to the USD/JPY pair. That said, any meaningful upside seems elusive in the wake of the overnight dovish-sounding remarks by Federal Reserve Chair Jerome Powell.

Powell sent a clear message that the US central bank will soften its stance and said that it was time to moderate the pace of interest rate hikes. This leads to an extension of the recent sharp downfall in the US Treasury bond yields. In fact, the yield on the benchmark 10-year US Treasury note languished near a two-month low and should continue to act as a headwind for the greenback.

Furthermore, Bank of Japan (BoJ) board member Asahi Noguchi signalled chances of pre-emptive stimulus withdrawal if inflation overshoots expectations. The hawkish remarks offset a downward revision of Japan's Manufacturing PMI, which fell to 49.0 in November from 50.7 previous. This, in turn, could underpin the Japanese Yen and contribute to capping the upside for the USD/JPY pair.

Hence, the modest rebound could still be attributed to some intraday short-covering amid an oversold RSI (14) on the 1-hour chart. Market participants now look to the US macro data - the Core PCE Price Index (the Fed's preferred inflation gauge) and ISM Manufacturing PMI. This, along with the US bond yields and the broader market risk sentiment, might provide some impetus to the USD/JPY pair.

Technical levels to watch