USD/JPY sicks to gains near daily high, around mid-113.00s amid stronger USD/risk-on

• A combination of supporting factors assisted USD/JPY to regain positive traction on Monday.
• The risk-on mood undermined the safe-haven JPY, hawkish Fed expectations benefitted the USD.
• Investors might refrain from placing aggressive bets ahead of the FOMC/BoJ meeting this week.

The USD/JPY pair maintained its bid tone through the early European session and was last seen hovering near the top end of the intraday trading range, around mid-113.00s.

The pair attracted fresh buying near the 113.25 region on Monday and was supported by a combination of factors. Easing concerns about the potential economic fallout from the spread of the new Omicron variant of the coronavirus remained supportive of the upbeat market mood. This, in turn, undermined the safe-haven Japanese yen and acted as a tailwind for the USD/JPY pair.

On the other hand, the US dollar drew some support from firming expectations that the Fed would adopt a more aggressive policy response to contain stubbornly high inflation. The markets bets were reaffirmed by Friday's US CPI report, showing that the yearly rate accelerated to the highest level since 1982 and the core reading posted the sharpest rise since mid-1991.

A stronger greenback was seen as another factor that provided a modest lift to the USD/JPY pair. That said, a softer tone around the US Treasury bond yields could hold back bullish traders from placing aggressive bets. Traders might also prefer to move on the sidelines ahead of this week's central bank event risks – the FOMC decision on Wednesday and the BoJ meeting on Thursday.

The Fed is widely expected to quicken the pace of tapering the bond purchases and set the stage for an earlier-than-expected interest rate hike. It is worth recalling that the markets have been pricing in the possibility for an eventual lift-off in May 2022. Hence, the outcome will play a key role in influencing the USD and provide a fresh directional impetus to the USD/JPY pair.

From a technical perspective, the USD/JPY pair has been oscillating in a narrow trading band over the past one week or so. In the absence of any major market-moving economic releases, this makes it prudent to wait for a strong follow-through buying before positioning for any further appreciating move. Nevertheless, the intraday price action favours bullish traders.

Technical levels to watch