USD/JPY consolidates around mid-138.00s, bulls retain control near YTD top ahead of US PMIs

• USD/JPY pulls back after touching a fresh YTD peak on Tuesday, albeit lacks follow-through.
• Elevated US bond yields continue to underpin the USD and act as a tailwind for the major.
• The Fed-BoJ policy divergence supports prospects for a further near-term appreciating move.

The USD/JPY pair eases from the vicinity of the 139.00 mark, or a fresh YTD peak touched earlier this Tuesday and remains on the defensive heading into the European session. The pair currently trades with a mild negative bias, around the 138.50-138.45 region, though any meaningful pullback still seems elusive.

The US Dollar (USD) holds steady just below a two-month high touched last Friday amid growing acceptance that the Federal Reserve (Fed) is likely to continue hiking interest rates, which, in turn, should act as a tailwind for the USD/JPY pair. In fact, a slew of influential FOMC members on Monday reaffirmed market bets that the US central bank will keep interest rates higher for longer. This, along with hopes that US politicians can come together on a debt ceiling deal, keeps the US Treasury bond yields elevated and continues to benefit the Greenback.

In fact, the yield on the benchmark 10-year US government bond rose for a seventh day in a row on Monday and registered its longest winning streak since April 2022. The resultant widening of the US-Japan rate differential, along with a more dovish stance adopted by the Bank of Japan (BoJ), undermine the Japanese Yen (JPY) and support prospects for the emergence of some dip-buying around the USD/JPY pair, warranting caution for bearish traders. In fact, BoJ Governor Kazuo Ueda said on Friday the central bank will continue easing with yield curve control.

The aforementioned supportive fundamental backdrop suggests that the path of least resistance for the USD/JPY pair is to the upside. Hence, any subsequent downtick is more likely to get bought into and remain limited ahead of Tuesday's release of the flash US PMI prints, due later during the early North American session. The US economic docket also features New Home Sales data and the Richmond Manufacturing Index. This, along with the US bond yields and the US debt ceiling talks, should influence the USD price dynamics and provide some impetus to the pair.

Technical levels to watch