USD/JPY trades just below weekly top amid positive risk tone, upside seems limited

• USD/JPY steadily climbs back closer to the weekly high, though lacks bullish conviction.
• A positive risk tone undermines the safe-haven JPY and acts as a headwind for the pair.
• Rising bets for smaller Fed rate hikes weigh on the USD and continue to cap the upside.

The USD/JPY pair edges higher on Wednesday and inches back closer to the top end of its weekly range, though the intraday uptick lacks bullish conviction. The pair holds steady below the mid-132.00s through the early European session and is influenced by a combination of diverging forces.

A generally positive tone around the equity markets undermines the safe-haven Japanese Yen and lends some support to the USD/JPY pair. The upside, however, remains capped amid the emergence of fresh US Dollar selling, weighed down by expectations that the Federal Reserve will soften its hawkish stance. The bets were lifted by last week's data, which showed that the US wage growth in December and pointed to signs of easing inflationary pressures.

Furthermore, business activity in the US services sector contracted and hit the worst level since 2009 in December. This, in turn, reaffirmed expectations for relatively smaller rate hikes by the Fed, which keeps the US Treasury bond yields depressed near a multi-week low and continues to weigh on the buck. This, along with speculations that the Bank of Japan will tighten its monetary policy in the near future, acts as a headwind for the USD/JPY pair.

Traders, meanwhile, seem reluctant to place aggressive bets and prefer to wait for the release of the US consumer inflation figures on Thursday. The crucial US CPI report should provide some clarity on whether the Fed will have to increase its target rate beyond 5% to curb stubbornly high inflation. This, in turn, will play a key role in influencing the near-term USD price dynamics and help determine the near-term trajectory for the USD/JPY pair.

In the meantime, the US bond yields could drive the USD demand in the absence of any relevant market-moving economic releases from the US. Apart from this, the broader risk sentiment will be looked upon for short-term trading opportunities around the USD/JPY pair. Nevertheless, the fundamental backdrop suggests that the path of least resistance for spot prices is to the downside and any meaningful upside is more likely to get sold into.

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