USD/JPY steadily climbs to 132.30 area amid positive risk tone, upside seems limited

• USD/JPY regains strong positive traction on Tuesday and draws support from a combination of factors.
• A positive risk tone undermines the safe-haven JPY and acts as a tailwind amid a modest USD strength.
• Bets for a less hawkish Fed warrant caution for USD bulls and might cap any further gains for the pair.

The USD/JPY pair builds on the previous day's recovery from the vicinity of mid-130.00s, or its lowest level since February 10 and gains strong follow-through traction on Tuesday. The positive momentum remains uninterrupted through the first half of the European session and lifts spot prices to a fresh daily high, around the 132.25-132.30 region in the last hour.

A generally positive risk tone undermines demand for the safe-haven Japanese Yen (JPY) and turns out to be a key factor acting as a tailwind for the USD/JPY pair. The news that UBS will rescue Credit Suisse in a $3.24 billion deal helps ease fears of widespread contagion risk and boosts investors' confidence. This is evident from a further recovery in the equity markets, which, along with a modest US Dollar bounce from a five-week low touched on Monday, remains supportive of the intraday move up.

The USD draws some support from a further recovery in the US Treasury bond yields, though expectations that the Federal Reserve (Fed) will adopt a less hawkish stance keeps a lid on any meaningful upside. In fact, the current market pricing indicates a greater chance of a 25 bps Fed rate hike on Wednesday. Investors also expect that the US central bank might even cut rates during the second half of the year and the speculations were fueled by the recent collapse of two mid-size US banks.

Hence, the market focus will remain glued to the outcome of the highly-anticipated two-day FOMC monetary policy meeting, starting this Tuesday. Investors will closely scrutinize the accompanying statement and Fed Chair Jerome Powell's comments at the post-meeting press conference for clues about the future rate-hike path. This, in turn, will play a key role in influencing the USD price dynamics in the near term and help investors to determine the next leg of a directional move for the USD/JPY pair.

In the meantime, traders on Tuesday will take cues from the release of the US Existing Home Sales data, due later during the early North American session. This, along with the US bond yields, will drive the USD demand and provide some impetus to the USD/JPY pair. Apart from this, the broader risk sentiment could further contribute to producing short-term opportunities.

Technical levels to watch