USD/JPY recovers intraday losses amid modest USD strength, remains below mid-131.00s

• USD/JPY bounces off a daily low amid a modest USD uptick, albeit lacks any follow-through buying.
• Bets for an imminent Fed rate-hike pause keep a lid on the buck and act as a headwind for the pair.
• The narrowing of the US-Japan rate-differential benefits the JPY and contributes to capping the upside.

The USD/JPY pair attracts some dip-buying near the 130.80-130.75 region on Thursday and builds on its steady intraday ascent through the early part of the European session. The pair, for now, seems to have stalled this week's rejection slide from the 100-day Simple Moving Average (SMA), though seems to struggle to capitalize on the momentum beyond mid-131.00s.

The US Dollar (USD) edges higher for the second successive day and looks to build on the overnight modest recovery from over a two-month low, which, in turn, acts as a tailwind for the USD/JPY pair. Apart from this, signs of stability in the equity markets undermine the safe-haven Japanese Yen (JPY) and lend additional support to the major. That said, rising bets for an imminent pause in the Federal Reserve's (Fed) rate-hiking cycle hold back the USD bulls from placing aggressive bets and cap gains for the pair.

Investors now seem convinced that the Fed is nearly done with its inflation-fighting interest rate hikes. In fact, the current market pricing indicates an even chance of a 25 bps lift-off at the May policy meeting and the possibility of rate cuts by year-end. The bets were reaffirmed by the disappointing release of the US ADP report on Wednesday, showing that private-sector employers added 145K jobs in March as compared to the 200K anticipated. The data suggested that the Fed's efforts to cool the labor market could be having some impact.

This, in turn, keeps the US Treasury bond yields depressed near their lowest level in seven months. This results in the narrowing of the US-Japan rate differential, which drives some flows towards the JPY and contributes to keeping a lid on any meaningful upside for the USD/JPY pair. Traders also seem reluctant ahead of the release of the closely-watched US jobs data, or the NFP report on Friday. In the meantime, the US Weekly Initial Jobless Claims might provide some impetus later during the early North American session on Thursday.

Technical levels to watch