USD/JPY temporarily capped by 50 DMA but bullish potential intact

• USD/JPY seesaws between tepid gains/minor losses through the early North American session.
• The Fed-BoJ policy divergence continues to undermine the JPY and offers support to the major.
• Retreating US bond yields seem to act as a headwind for the USD and cap any meaningful gains.

The USD/JPY pair struggles to capitalize on its gains recorded over the past two sessions and meets with some supply ahead of the 135.50 area. Spot prices drop to a fresh daily low during the early North American session, albeit quickly bounce back to the 135.00 psychological mark.

A big divergence in the monetary policy stance adopted by the Bank of Japan and the Federal Reserve continues to undermine the Japanese yen, which, in turn, acts as a tailwind for the USD/JPY pair. In fact, the BoJ has repeatedly said that it would retain its ultra-easy policy settings. In contrast, the Fed is expected to stick to its policy tightening path despite signs of easing US inflation.

The bets were reaffirmed by the minutes of the July 26-27 FOMC policy meeting, which indicated that policymakers would not consider pulling back on rate hikes until inflation came down substantially. Apart from this, better-than-expected US macroeconomic releases assist the US dollar to stand tall near the monthly low. This is seen as another factor lending some support to the USD/JPY pair.

Data released this Thursday showed that the Philly Fed Manufacturing Index climbed to 6.2 in August, beating consensus estimates for an improvement to -5 from the -12.3 reported in the previous month. Separately, the US Initial Jobless Claims unexpectedly fell to 250K during the week ended August 12 from the previous week's downwardly revised reading of 252K (262K reported previously).That said, retreating US Treasury bonds yields seem to hold back the USD bulls from placing aggressive bets and capping the upside for the USD/JPY pair, at least for the time being.

Looking at the charts the pair is being further restrained by the 50-day SMA which is capping gains at the day's highs and needs to be clearly vaulted before bulls can be confident of continuing their short-term uptrend. Nevertheless, the fundamental backdrop supports prospects for a further near-term appreciating move for the USD/JPY pair, suggesting that any meaningful dip could be seen as a buying opportunity and the possibility of a break higher remains alive.

Technical levels to watch