USD/JPY refreshes daily top amid notable USD demand, upside potential seems limited

• USD/JPY gains some positive traction on Thursday and snaps a three-day losing streak.
• Some follow-through USD buying is seen as a key factor lending support to the major.
• Bets for an imminent Fed rate-hike pause and a softer risk tone could cap further gains.

The USD/JPY pair reverses an early North American session dip to sub-131.00 levels and climbs to a fresh daily top in the last hour, snapping a three-day losing streak. The pair moves further away from a one-week low touched on Wednesday and now trades around the 131.65-131.70 region, up nearly 0.30% for the day.

The US Dollar (USD) is seen building on the previous day's bounce from over a two-month low and gaining some follow-through traction for the second successive day, which, in turn, acts as a tailwind for the USD/JPY pair. That said, any meaningful upside still seems elusive amid growing acceptance that the Federal Reserve (Fed) is nearly done with its inflation-fighting rate hikes. In fact, the markets are pricing in an even chance of a 25bps lift-off at the next FOMC meeting in May and the possibility of rate cuts by year-end.

A larger-than-expected rise in the US Weekly Initial Jobless Claims comes on the back of the disappointing release of the US ADP report on Wednesday and suggests that the Fed's efforts to cool the labor market could be having some impact. The data lifts bets for an imminent pause in the rate-hiking cycle by the US central bank, which keeps the US Treasury bond yields depressed near a multi-month low. This, in turn, should hold back the USD bulls from placing aggressive bets and cap gains for the USD/JPY pair, at least for now.

Traders might also prefer to move to the sidelines and wait for the release of the closely-watched US monthly employment data on Friday. The popularly known NFP report will play a key role in influencing market expectations about the next policy move by the Fed and drive the USD demand. This, in turn, should help investors to determine the next leg of a directional move for the USD/JPY pair. Nevertheless, the fundamental backdrop warrants some caution before positioning for any further appreciating move for the major.

Technical levels to watch