USD/JPY Forecast: Bulls looking to seize back control despite mounting recession fears

• USD/JPY posted gains for the second successive day on Monday, though lacked follow-through.
• Reducing bets for more aggressive Fed rate hikes weighed on the USD and acted as a headwind.
• The Fed-BoJ monetary policy stance should continue to lend support and favours bullish traders.

The USD/JPY pair attracted some dip-buying on the first day of a new week and climbed over 100 pips from the daily swing low, around mid-134.00s. Spot prices recorded modest gains for the second straight day, albeit lacked bullish conviction amid a softer tone surrounding the US dollar. The recent slump in commodity prices raised hopes that inflation might be nearing its peak and forced investors to scale back expectations for aggressive Fed rate hike moves. This, in turn, dragged the buck to over a one-week low and acted as a headwind for the major.

The USD remained depressed and failed to gain any respite from upbeat US Durable Goods Orders, which unexpectedly rose by 0.7% MoM in May. Orders excluding transportation items also surpassed estimates and increased by 0.7% during the reported month. This, however, was overshadowed by worries that rapidly rising interest rates and tighter financial conditions could tip the world's largest economy into a recession. Apart from this, a modest decline in the US equity markets benefitted the safe-haven Japanese yen and contributed to capping gains for the USD/JPY pair.

The downside, however, remains cushioned amid the recent advance in the US Treasury bond yields, which resulted in the widening of the gap between the US-Japanese bond yields. Apart from this, a big divergence in the monetary policy stance adopted by the Fed (hawkish) and the Bank of Japan (dovish) should keep the USD/JPY afloat. This, in turn, suggests that any meaningful pullback could be seen as a buying opportunity and remain limited. Hence, it will be prudent to wait for strong follow-through selling before confirming that a near-term top is already in place.

Market participants now look forward to the US economic docket, featuring the release of the Conference Board's Consumer Confidence Index and Richmond Manufacturing Index later during the early North American session. This, along with the US bond yields, will influence the USD and provide some impetus to the USD/JPY pair. Traders will further take cues from the broader market risk sentiment to grab short-term opportunities ahead of Fed Chair Jerome Powell's appearance on Thursday.

Technical outlook

From a technical perspective, the 135.00 psychological mark now seems to protect the immediate downside. Any further decline might continue to find decent support near the 134.30-134.25 horizontal zone, which should now act as a key pivotal point. Sustained weakness below, leading to a subsequent break through the 134.00 mark, would shift the bias in favour of bearish traders and pave the way for a deeper correction. The USD/JPY pair might then accelerate the fall towards the 133.35 intermediate support en-route the 133.00 round figure and the next relevant support near the 132.20 region.

On the flip side, momentum back above the 135.60-135.70 region should allow the USD/JPY pair to surpass the 136.00 mark and aim back to test a 24-year high, around the 136.70 area touched last week. This is closely followed by the 137.00 mark, which if conquered would set the stage for the resumption of the recent strong bullish trajectory witnessed since early March.