• USD/JPY regained positive traction and reversed a part of Friday’s heavy losses.
• The BoJ’s dovish stance, improving risk sentiment weighed on the safe-haven JPY.
• Aggressive Fed rate hike bets underpinned the USD and offered additional support.
• Investors now eye US ISM for some impetus, though the focus remains on FOMC.

The USD/JPY pair maintained its bid tone through the early European session and was last seen hovering near the daily high, just below the mid-130.00s.

A combination of supporting factors assisted the USD/JPY pair to attract fresh buying on the first day of a new week and reversed a part of Friday's retracement slide. Signs of stability in the equity markets undermined the safe-haven Japanese yen, which was further weighed down by a more dovish stance adopted by the Bank of Japan. It is worth recalling that the Japanese central bank last week stuck to its ultra-loose policy setting and vowed to conduct daily operations to defend its “near-zero” target for 10-year bond yields.

Conversely, the market conviction that the Fed would tighten its monetary policy at a faster pace to combat stubbornly high inflation remained supportive of elevated US Treasury bond yields. This has resulted in the widening of the Japanese-US government bond yield differential, which was seen as another factor that drove flows away from the JPY. This, along with the emergence of fresh US dollar buying, offered additional support to the USD/JPY pair. Bulls, however, refrained from placing fresh bets ahead of this week's key event/data risks.

Investors might prefer to wait for the outcome of a two-day FOMC monetary policy meeting, starting this Tuesday. The Fed will announce its decision on Wednesday and is widely expected to hike interest rates by 50 bps. Traders this week will further take cues from important US macro releases scheduled at the beginning of a new month, including the closely watched monthly jobs report - popularly known as NFP on Friday. In the meantime, the US ISM Manufacturing PMI might provide some impetus to the USD/JPY pair later during the North American session.

Technical levels to watch