The USD/JPY pair lacks strong intraday directional bias on Thursday and seesaws between tepid gains/minor losses through the first half of the European session. The pair is currently placed around the 134.65 region, just below a five-week high touched on Wednesday and is influenced by a combination of diverging forces.
A fresh wave of the global risk-aversion trade boosts demand for traditional safe-haven assets and benefits the Japanese Yen (JPY). Apart from this, a modest US Dollar (USD) downtick, led by the ongoing pullback in the US Treasury bond yields from a nearly one-month high touched on Thursday, acts as a headwind for the USD/JPY pair. Meanwhile, an intraday decline in the US bond yields narrows the US-Japan rate differential and lends additional support to the JPY.
That said, the prospects for further policy tightening by the Federal Reserve (Fed) should help limit the downside for the US bond yields and favours the USD bulls. The markets seem convinced that the Fed will continue raising interest rates and have fully priced in a 25 basis point (bps) lift-off in May. Moreover, the Fed funds futures indicate a slight chance of another rate hike at the June FOMC meeting in the wake of the recent hawkish comments by Fed officials.
In contrast, the new Bank of Japan (BoJ) Governor, Kazuo Ueda, reiterated earlier this week that there is no immediate need to review the 2013 joint statement with the government and that the central bank will maintain current monetary easing. The dovish BoJ stance might discourage traders from placing aggressive bullish bets around the JPY. The Fed-BoJ policy divergence suggests that the path of least resistance for the USD/JPY pair remains to the upside.
Market participants now look to the US economic docket, featuring the usual Weekly Initial Jobless Claim release, the Philly Fed Manufacturing Index and Existing Home Sales data later during the early North American session. This, along with speeches by influential FOMC members and the US bond yields, will drive the USD demand and provide some impetus to the USD/JPY pair. Traders will take cues from the broader risk sentiment to grab short-term opportunities.