- USD/JPY gained some positive traction on Friday amid a modest USD strength.
- Hawkish Fed expectations, rising US bond yields acted as a tailwind for the USD.
- Geopolitical tensions could benefit the safe-haven JPY and cap any further gains.
- Traders might also wait for the US CPI report before placing fresh directional bets.
The USD/JPY pair edged higher through the mid-European session and climbed to a fresh daily high, around the 113.75-80 region in the last hour.
Following a brief consolidation during the first half of the trading action on Friday, the USD/JPY pair regained positive traction and was supported by a combination of factors. The prospects for a faster policy tightening by the Fed continued acting as a tailwind for the US dollar. Apart from this, a fresh leg up in the US Treasury bond yields further underpinned the greenback and provided a modest lift to the USD/JPY pair.
However, the cautious market mood – amid escalating geopolitical tensions – could extend some support to the safe-haven Japanese yen and cap gains for the USD/JPY pair. There are fears that Russia could invade Ukraine. The United States and its allies have warned Russia of tough sanctions if it again attacks its neighbour. This, along with anxiety ahead of the US consumer inflation figures, weighed on investors' sentiment.
The markets seem convinced that the Fed would adopt a more aggressive policy response to contain stubbornly high inflation and have been pricing in the possibility for an eventual liftoff in May 2022. Hence, the US CPI report will provide fresh cues about the Fed's near-term policy outlook and its strategy on interest rates. This will influence the USD price dynamics and provide a fresh directional impetus to the USD/JPY pair.
Even from a technical perspective, the recent two-way price moves witnessed over the past four trading sessions points to indecision among traders. This further makes it prudent to wait for a sustained strength beyond the 114.00 mark before placing fresh bullish bets around the USD/JPY pair and positioning for any meaningful upside.
