USD/JPY struggles for a firm direction, remains confined in range around 135.00 mark

The USD/JPY pair extends its sideways consolidative price move through the first half of the European session and remains confined in a narrow range near the 135.00 mark on Tuesday.

Worries about a global economic downturn, along with the US-China tensions over Taiwan, continues to lend some support to the safe-haven Japanese yen. The flight to safety is reinforced by the ongoing slide in the US Treasury bond yields. This, in turn, narrows the US-Japan rate differential and further benefits the JPY. Apart from this, a modest US dollar weakness is acting as a headwind for the USD/JPY pair.

The downside, however, remains cushioned amid a big divergence in the monetary policy stance adopted by the Bank of Japan and the Federal Reserve. In fact, the BoJ has repeatedly reiterated it will stick to its ultra-easy policy settings and its commitment to keep the 10-year Japanese government bond yield around 0%. In contrast, the US central bank is expected to retain and stick to its aggressive policy tightening path.

Friday's blockbuster US monthly jobs report eased fears that the economy was in recession and revived bets for a larger Fed rate hike move at the September policy meeting. Adding to this, Fed Governor Michelle Bowman said on Saturday that the US central bank should consider more 75 bps hikes at coming meetings to bring inflation back down. Hawkish Fed expectations help limit the USD losses and lend support to the USD/JPY pair.

Investors also seem reluctant to place aggressive bets and prefer to wait for the latest US consumer inflation figures, scheduled for release on Wednesday. The US CPI report would provide fresh clues about the Fed's monetary policy outlook and play a key role in influencing the near-term USD price dynamics. This, in turn, should assist investors to determine the next leg of a directional move for the USD/JPY pair.

In the meantime, the USD remains at the mercy of the US bond yields amid absent relevant market-moving economic releases on Tuesday. Apart from this, the broader market risk sentiment would be looked upon for short-term trading opportunities around the USD/JPY pair. The fundamental backdrop, however, suggests that the USD/JPY pair is more likely to prolong the subdued/range-bound price action ahead of the key data risk.

Technical levels to watch