USD/JPY struggles below 136.00 mark, flirts with the critical 200-day SMA

• USD/JPY fails to gain any meaningful traction on Monday amid a combination of diverging factors.
• Bets for an eventual BoJ pivot benefit the JPY and cap the upside amid a modest USD downtick.
• An uptick in the US bond yields could limit the USD losses and lend some support to the major.
• Traders might also prefer to wait on the sidelines ahead of the BoJ policy meeting on Tuesday.

The USD/JPY pair struggles to capitalize on its modest intraday uptick and attracts some sellers near the 136.60 region on Monday. The pair retreats to the lower end of its daily range, below the 136.00 mark during the early European session and is pressured by a combination of factors.

The Japanese Yen draws some support from a weekend report that the government could revise the Bank of Japan's 2% inflation target and make it more flexible. The revision could allow the BoJ to tweak its ultra-loose policy stance, which has been the key factor behind the recent slump in domestic currency. Apart from this, a modest US Dollar downtick acts as a headwind for the USD/JPY pair.

The USD downside, however, remains cushioned amid a pickup in the US Treasury bond yields, bolstered by a more hawkish commentary by the Fed last week. In fact, the US central bank said that it will continue to raise rates to crush inflation and projected at least an additional 75 bps increase in borrowing costs by the end of 2023. This, in turn, is seen lending some support to the USD/JPY pair.

Traders might also refrain from placing aggressive bets and prefer to wait on the sidelines ahead of the BoJ monetary policy meeting on Tuesday. This, in turn, warrants some caution before positioning for a firm intraday direction in the absence of any relevant macro data. Meanwhile, the USD/JPY pair's inability to gain any traction suggests that the recent downtrend is still far from being over.

Moreover, the range-bound price moves witnessed over the past two weeks or so constitute the formation of a rectangle on the daily chart. Given the recent sharp corrective pullback from a 32-year peak, this might still be categorized as a bearish consolidation phase. That said, a sustained weakness and acceptance below the very important 200-day SMA is needed to confirm a fresh breakdown.

Technical levels to watch