USD/JPY climbs to fresh daily high, eyes mid-138.00s despite softer USD

• USD/JPY rebounds around 80 pips from the daily low and refreshes the daily top in the last hour.
• A combination of factors undermines the safe-haven JPY and lends some support to the pair.
• A modest USD weakness might hold back bulls from placing aggressive bets and cap gains.

The USD/JPY pair attracts some buying following an intraday dip to the 137.50-137.45 region on Monday and climbs to a fresh daily high heading into the North American session. The pair is currently placed around the 138.30-138.35 zone and for now, seems to have stalled its retracement slide from the YTD peak touched on Friday.

Against the backdrop of a more dovish stance adopted by the Bank of Japan (BoJ), the optimism over a potential improvement in US-China relations undermines the safe-haven Japanese Yen (JPY) and acts as a tailwind for the USD/JPY pair. In fact, BoJ Governor  Kazuo Ueda said on Friday that tightening monetary policy in the wake of expectations that inflation will slow back below the 2% target in the middle of the current fiscal year would hurt the economy. Ueda added that the BoJ will continue easing with yield curve control.

Meanwhile, US President Joe Biden said during the Group of Seven (G7) summit in Japan that he expects relations between the US and Beijing to improve very shortly. This, to some extent, offsets worries over slowing global growth and weighs on the JPY. The US Dollar (USD), on the other hand, is dragged down by a surprise breakdown in the US debt ceiling negotiations and less hawkish remarks by Federal Reserve (Fed) Chair Jerome Powell. This might hold back traders from placing aggressive bullish bets around the USD/JPY pair.

Speaking at a Fed research conference, Powell said on Friday it is still unclear if interest rates will need to rise further amid uncertainty about the impact of past hikes and recent bank credit tightening. Adding to this, Minneapolis Fed President Neel Kashkari said this Monday that it was a close call on whether he will be in favour of hiking the policy rate one more time in June or pausing. Apart from this, the US debt ceiling woes trigger a fresh leg down in the US Treasury bond yields, which acts as a headwind for the USD and might cap the USD/JPY pair.

In the absence of any relevant market-moving economic data from the US, the focus will remain glued to a key meeting between President Joe Biden and House Republican Speaker Kevin McCarthy to discuss the debt ceiling. Apart from this, the US bond yields will influence the USD price dynamics and provide some impetus to the USD/JPY pair. Traders will further take cues from the broader risk sentiment to grab short-term opportunities ahead of the BoJ Core CPI print and the flash Japan Manufacturing PMI, due during the Asian session on Tuesday.

Technical levels to watch