• USD/JPY caught fresh bids on Tuesday and climbed back closer to the multi-year peak.
• The widening of the US-Japanese government bond yield differential acted as a tailwind.
• Overbought conditions held back bulls from placing fresh bets ahead of the US CPI report.

The USD/JPY pair traded with a mild positive bias through the first half of the European session and was last seen hovering around the 125.65-125.70 region, up over 0.25% for the day.

The pair attracted fresh buying in the vicinity of the 125.00 psychological mark on Tuesday and inched back closer to the highest level since June 2015 touched the previous day. The widening of the US-Japanese government bond yield differential continued weighing on the Japanese yen and acted as a tailwind for the USD/JPY pair amid modest US dollar strength.

The Bank of Japan has repeatedly said that it remains ready to use powerful tools to avoid long-term interest rates from rising too much. In fact, the Japanese central bank last month offered to buy unlimited 10-year Japanese government bonds to defend the 0.25% yield cap. This, to a larger extent, negated a generally weaker risk tone, which tends to benefit the safe-haven JPY.

On the other hand, firming expectations for a more aggressive policy tightening by the Fed pushed the US Treasury bond yields to a fresh multi-year peak. Adding to this, concerns that the recent surge in commodities will put upward pressure on already high consumer prices remained supportive of elevated US bond yields. This, in turn, lifted the USD to its highest level since May 2020.

That said, overbought conditions on short-term charts held back bullish traders from placing aggressive bets. Investors also seemed reluctant and preferred to wait on the sidelines ahead of the US consumer inflation figures, due for release later during the early North American session. The data will influence the USD price dynamics and provide a fresh impetus to the USD/JPY pair.

Technical levels to watch