USD/JPY steadily climbs back closer to 134.00 mark amid modest USD strength

• USD/JPY regains some positive traction on Tuesday amid some follow-through USD buying.
• Hawkish Fed expectations, elevated US bond yields push the USD closer to the monthly high.
• The Fed-BoJ policy divergence favour bullish traders, though recession fears might cap gains.

The USD/JPY pair attracts some dip-buying near the 132.95 area on Tuesday and climbs to a fresh daily high during the early European session. The pair is currently placed around the 133.70 region and is looking to build on its recent bounce from the 131.75-131.70 region touched last Thursday in the aftermath of the softer US CPI report.

The US dollar gains traction for the third straight day and climbs back closer to the monthly peak, which turns out to be a key factor acting as a tailwind for the USD/JPY pair. Despite last week's softer US CPI report, Fed officials stressed that it is too soon to declare a victory on inflation and have maintained a hawkish tone. This, in turn, suggested that the Fed would stick to its policy tightening path and remain supportive of elevated US Treasury bond yields, offering support to the buck.

In contrast, the Bank of Japan has repeatedly said that it would retain its ultra-easy policy settings and remains committed to keeping the 10-year Japanese government bond yield around 0%. This marks a big divergence in comparison to a more hawkish stance adopted by the US central bank, which underpins the Japanese yen and provides an additional lift to the USD/JPY pair. That said, recession fears continue to weigh on investors' sentiment and extend some support to the safe-haven JPY, which could cap the USD/JPY pair.

Traders now look forward to Tuesday's US economic docket, featuring housing market data and Industrial Production figures, which might influence the USD and provide some impetus to the USD/JPY pair. The focus, however, would remain on the US monthly Retail Sales and the FOMC monetary policy meeting minutes, both scheduled for release on Wednesday. In the meantime, traders might refrain from placing aggressive bets and prefer to move on the sidelines. This might also contribute to keeping a lid on any meaningful gains for the USD/JPY pair.

Technical levels to watch