• USD/JPY witnesses a modest pullback from over a one-week high touched earlier this Monday.
• Retreating US bond yields keep the USD bulls on the defensive and act as a headwind for the pair.
• The Fed-BoJ policy divergence should help limit the downside amid a bullish technical setup.

The USD/JPY pair surrenders its modest intraday gains to over a one-week high set earlier this Monday and slips below the 135.00 mark during the early part of the European session.

Retreating US Treasury bond yields keep the US dollar bulls on the defensive, which, in turn, acts as a headwind for spot prices. That said, a big divergence in the monetary policy stance adopted by the Bank of Japan and the Federal Reserve should help limit deeper losses for the USD/JPY pair.

From a technical perspective, Friday's strong move up beyond the 50% Fibonacci Retracement level of the recent pullback from the 24-year high favours bullish traders. Hence, any meaningful pullback could be seen as a buying opportunity near the mid-134.00s and remain limited near the 134.00-133.90 area.

The latter coincides with the 38.2% Fibo. level, which if broken decisively would negate the near-term positive bias and make the USD/JPY pair vulnerable. Spot prices would then accelerate the fall towards the 133.00 mark before eventually dropping to the 132.50 area, or the 23.6% Fibo. level.

On the flip side, the 135.50-135.60 area now seems to have emerged as immediate resistance. Some follow-through buying has the potential to lift the USD/JPY pair towards the 61.8% Fibo. level, around the 136.00 marks. A sustained strength beyond would be seen as a fresh trigger for bulls and pave the way for a more toward the 136.65 intermediate hurdle en-route the 137.00 and the 137.45 region.

USD/JPY 4-hour chart

Key levels to watch