USD/JPY sticks to modest intraday gains just below mid-134.00s, lacks follow-through

• USD/JPY kicks off the new week on a positive note in reaction to dovish remarks by BoJ’s Ueda.
• The Fed-BoJ policy divergence weighs on the JPY and remains supportive of the intraday gains.
• Sliding US bond yields acts as a headwind for the USD and keeps a lid on any meaningful upside.

The USD/JPY pair builds on Friday's bounce from the vicinity of mid-133.00s and gains some follow-through traction on the first day of a new week. The pair maintains its bid tone through the early part of the European session and currently trades around the 134.30 region, just a few pips below the daily top.

The Japanese Yen (JPY) weakens in reaction to the Bank of Japan (BoJ) Kazuo Ueda's dovish remarks on Monday, saying that the central bank must maintain monetary easing as trend inflation is still below 2%. Ueda added that inflation forecasts must be quite strong and close to 2% in the coming year to consider tweaking yield curve control. In contrast, the Federal Reserve (Fed) is expected to continue raising interest rates to curb stubbornly high inflation. This, in turn, acts as a tailwind for the US Dollar (USD) and is seen lending some support to the USD/JPY pair.

In fact, the markets have fully priced in a 25 bps lift-off at the next FOMC policy meeting in May and the Fed funds future points to a small chance of another rate hike in June. The bets were lifted by the recent hawkish remarks by several Fed officials. Adding to this, the incoming US macro data suggested that the world's largest economy remained resilient and supports prospects for further tightening by the Fed. That said, a fresh leg down in the US Treasury bond yields holds back the USD bulls from placing aggressive bets and caps the USD/JPY pair amid a weaker risk tone.

Worries about economic headwinds stemming from rising borrowing costs temper investors' appetite for riskier assets, which is evident from a generally weaker tone around the equity markets. This, in turn, could drive some haven flows towards the JPY and keep a lid on any meaningful upside for the USD/JPY pair, at least for the time being. In the absence of any relevant market-moving economic releases, the aforementioned mixed fundamental backdrop warrants some caution before positioning for any further intraday appreciating move for the major.

Technical levels to watch