USD/JPY struggles for a firm direction, remains confined in range below 145.00 mark

• USD/JPY edges higher on Tuesday, though lacks follow-through and remains below the 145.00 mark.
• The Fed-BoJ policy divergence, the risk-on mood undermines the safe-haven JPY and offers support.
• Retreating US bond yields continues to weigh on the USD and caps any meaningful gains for the pair.

The USD/JPY pair extends its consolidative price move on Tuesday and remains confined in a one-week-old trading range, below the 145.00 psychological mark through the first half of the European session.

A big divergence in the monetary policy stance adopted by the Bank of Japan and other major central banks, along with the risk-on impulse, undermines the safe-haven Japanese yen. This, in turn, acts as a tailwind for the USD/JPY pair. That said, a combination of factors is holding back bulls from placing aggressive bets and capping the upside, at least for the time being.

Japan's Finance Minister Shunichi Suzuki said on Monday that the country stands ready to take decisive steps in the foreign exchange market if excessive yen moves persist. This, along with the prevalent selling bias surrounding the US dollar and the narrowing of the US-Japan rate differential, further contributes to keeping a lid on any meaningful gains for the USD/JPY pair.

The Bank of England's reaffirmation to buy up to £5 billion of long-dated gilts drags the US Treasury bond yields away from a multi-year top touched last week. This, in turn, forces the USD to prolong its recent sharp pullback from a two-decade high. That said, expectations for a more aggressive policy tightening by the Fed support prospects for the emergence of some USD dip-buying.

The markets seem convinced that the Fed will continue to hike interest rates at a faster pace to tame inflation and have been pricing in another supersized 75 bps increase in November. The USD bulls, however, await a fresh catalyst before placing bets. Hence, the focus will remain glued to the release of the closely-watched US monthly employment details or the NFP report on Friday.

In the meantime, traders on Tuesday will take cues from the US economic docket, featuring JOLTS Job Openings and Factory Orders data later during the early North American session. This, along with speeches by influential FOMC members and the USD bond yields, will drive the USD demand. Apart from this, the broader risk sentiment should provide some impetus to the USD/JPY pair.

Technical levels to watch