USD/JPY remains on the defensive below YTD peak amid softer USD, bullish potential intact

• USD/JPY eases from a fresh YTD peak touched on Monday amid a modest USD downtick.
• The Fed-BoJ policy divergence acts as a tailwind for the pair and helps limit the downside.
• Investors now look forward to the US macro data to grab short-term trading opportunities.

The USD/JPY pair corrects from a fresh YTD top touched earlier this Monday and remains on the defensive through the first half of the European session. Spot prices, however, manage to hold above the 136.00 mark and seem poised to prolong the recent upward trajectory witnessed since the beginning of this month.

A softer tone surrounding the US Treasury bond yields trigger a modest US Dollar pullback from a seven-week high, which, in turn, is seen exerting some downward pressure on the USD/JPY pair. That said, a combination of factors acts as a tailwind for the major and helps limit the downside, warranting some caution before positioning for any meaningful depreciating move.

The Japanese Yen (JPY) is weighed down by dovish remarks from the incoming Bank of Japan (BoJ) Governor Kazuo Ueda, stressing the need to maintain the ultra-loose policy to support the fragile economy. Ueda further added that it is possible to push up prices and wages with monetary easing. This, along with a modest recovery in the US equity futures, undermines the safe-haven JPY.

Apart from this, expectations that the Federal Reserve will stick to its hawkish stance should act as a tailwind for the US bond yields and lend some support to the Greenback. Meanwhile, the divergent Fed-BoJ policy outlook supports prospects for the emergence of some dip-buying at lower levels and suggests that the path of least resistance for spot prices is to the upside.

Market participants now look forward to the US economic docket, featuring the release of Durable Goods Orders and Pending Home Sales data later during the early North American session. This, along with the US bond yields, will influence the USD price dynamics. Traders will further take cues from the broader risk sentiment to grab short-term opportunities around the USD/JPY pair.

Technical levels to watch