USD/JPY bulls move in on a critical hourly resistance

USD/JPY is attempting to move higher towards 138.50 and a key technical area on the hourly time frame. The US dollar remains firm in Asia, following the lead from overnight as the euro weakens into the European Central Bank meeting on Thursday. 

The day was dominated by European political dramas and concerns about European gas availability from the Nord Stream 1 pipeline. Gas orders have reportedly signalled that the Nord Stream will return to 40% of capacity but the caveat is that Moscow has warned that unless a spat over sanctioned parts is resolved, flows will be tightly curbed. Therefore, this leaves the euro and risk in EZ financial markets on tenterhooks as investors wait to see whether gas flows will resume on Thursday when maintenance on the Nord Stream pipeline is set to end. 

In other news, the prospects of Italian politics plunging into months of upheaval surrounding the resignation of the prime minister, Mario Draghi. Read more here: Italian PM Draghi will announce his resignation in the chamber tomorrow

This all circles over the ECB meeting. The ECB is expected to hike by 25bps and announce an anti-fragmentation tool. However, the risk of a 50bps hike has grown materially and is almost a coin toss as analysts at TD Securities argued. ''it is the sensible outcome to the meeting, but goes against recent communications.''

As for the US dollar, it rose in a choppy session, but its gains were capped as traders were hesitant to drive flows much further ahead of the ECB. The dollar index (DXY) climbed 0.459% while US Treasury yields were mixed, moving within narrow ranges, as bond investors balanced their positions ahead of another Federal Reserve meeting next week.

A fairly strong US 20-year bond auction contributed to gains on the long end while the yield of the US two-year note exceeded that of the benchmark 10-year debt by about 21.8 basis points. The inversion was as deep as 34.4 bps on Monday, the largest inversion since 2000, reflecting worries that aggressive Fed hikes could tip the world's largest economy into recession.

For the day ahead, domestically, the Bank of Japan is set to raise its inflation forecast on Thursday but maintain ultra-low interest rates and warn of risks to a fragile economy, reinforcing its position as an outlier in a wave of global increases to borrowing costs.