• Hawkish Fed expectations underpinned the USD and helped USD/JPY to gain some traction.
• Sliding US bond yields held back the USD bulls from placing fresh bets and capped the upside.
• The cautious market mood underpinned the safe-haven JPY and also warrants caution for bulls.

The USD/JPY pair traded with a mild positive bias, around the 114.10 region heading into the European session, albeit lacked any follow-through buying.

Having shown resilience below the 114.00 mark, the USD/JPY pair gained some positive traction on Thursday and reversed a part of the previous day's retracement slide from multi-year highs. The prospects for an early policy tightening by the Fed acted as a tailwind for the US dollar, which, in turn, was seen as a key factor that extended some support to the major.

That said, the cautious market mood – amid persistent worries about stubbornly high inflation – benefitted the Japanese yen's relative safe-haven status. Apart from this, retreating US Treasury bond yields held back the USD bulls from placing fresh bets and kept a lid on any meaningful upside for the USD/JPY pair, warranting caution for bullish traders.

Even from a technical perspective, the negative RSI divergence on the daily chart makes it prudent to wait for a strong follow-through buying before positioning for any further appreciating move. Market participants now look forward to the US economic docket, featuring the releases of the Philly Fed Manufacturing Index and the usual Weekly Initial Jobless Claims.

This, along with the US bond yields and a scheduled speech by New York Fed President John Williams, will influence the USD and provide some impetus later during the early North American session. Traders will further take cues from the broader market risk sentiment to grab some short-term opportunities around the USD/JPY pair.

Technical levels to watch