USD/JPY sticks to gains near multi-day peak, just above mid-137.00s

• USD/JPY gains traction for the third successive day, though lacks bullish conviction.
• Expectations that the Fed will hike rates more than projected underpins the USD.
• The set-up warrants caution before positioning for any further appreciating move.

The USD/JPY pair builds on its recent bounce from the lowest level since August 16 and edges higher for the third successive day on Wednesday. The pair sticks to its modest gains through the first half of the European session and is currently trading around the 137.50-137.55 region, up nearly 0.40% for the day.

The US Dollar stands tall near a multi-day peak amid the prospects for further policy tightening by the Fed, which, in turn, acts as a tailwind for the USD/JPY pair. Friday's upbeat US jobs report (NFP), especially wage growth data, pointed to the possibility of a further rise in inflationary pressures. Adding to this, the better-than-expected US ISM Services PMI released on Monday suggested that the economy remained resilient despite rising borrowing costs. This, in turn, fuels speculations that the US central bank may lift interest rates more than recently projected and continues to lend support to the greenback.

The Japanese Yen, on the other hand, is undermined by dovish-sounding remarks by Bank of Japan (BoJ) policymakers. In fact, BoJ board member NakamuraToyoaki said that Japan's economy is still in the midst of recovering from a pandemic-induced slump and that the central bank must patiently maintain monetary easing. Apart from this, a mildly positive tone around the equity markets is seen as another factor weighing on the safe-haven JPY and acting as a tailwind for the USD/JPY pair. That said, the overnight comments by BoJ Governor Haruhiko Kuroda, on exiting the ultra-loose monetary policy, keep a lid on any further gains.

Traders also seem reluctant and prefer to wait for the key US macro data and central bank event risk next week - the release of the US consumer inflation figures and the FOMC policy meeting. This will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the USD/JPY pair. Hence, it will be prudent to wait for strong follow-through buying before confirming that spot prices have bottomed out and positioning for any further gains amid absent relevant economic releases on Wednesday.

Technical levels to watch