USD/JPY eases from over one-week tops, still well bid above 114.00 mark

• USD/JPY gained positive traction for the second straight session on Monday.
• The risk-on mood undermined the safe-haven JPY and remained supportive.
• A modest USD pullback from over two-week tops capped gains for the major.

The USD/JPY pair maintained its bid tone through the mid-European session, albeit has retreated a few pips from one-and-half-week tops touched earlier this Monday. The pair was last seen hovering around the 114.20-25 region, still up nearly 0.25% for the day.

Japanese Prime Minister Fumio Kishida's Liberal Democratic Party won more seats than expected in the general election and lifted expectations for additional measures to stimulate the economy. This, in turn, boosted investors' sentiment, which was evident from a generally positive tone around the equity markets. The risk-on impulse undermined the safe-haven Japanese yen and pushed the USD/JPY pair higher for the second straight session on Monday.

However, a modest US dollar pullback from two-and-half-week tops failed to impress bullish traders or provide any additional boost to the USD/JPY pair. The intraday positive move faltered just ahead of mid-114.00s, though any meaningful pullback is likely to remain limited amid a goodish pickup in the US Treasury bond yields. Investors might also prefer to wait on the sidelines heading into this week's critical FOMC monetary policy meeting.

The markets seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation. The speculations were fueled by Friday's US Core PCE Price Index – the Fed's preferred inflation gauge – that held near 30-year highs and indicated that consumer cost pressures are getting entrenched. This was seen as a key factor behind the latest leg up in the US bond yields, which could act as a tailwind for the USD.

The Fed is scheduled to announce its decision on Wednesday and influence the USD price dynamics. Apart from this, Friday's release of the closely-watched US monthly jobs report (NFP) will play a key role in determining the near-term trajectory for the USD/JPY pair. In the meantime, traders on Monday will take cues from the release of US ISM Manufacturing PMI and the broader market risk sentiment to grab some short-term opportunities around the major.

Technical levels to watch