• USD/JPY attracts some dip-buying on Tuesday and moves back closer to a one-month high.
• The USD stands tall near a two-decade high and offers support amid elevated US bond yields.
• The Fed-BoJ policy divergence favours bullish traders and supports prospects for further gains.

The USD/JPY pair reverses an intraday dip to the 137.00 mark and climbs back closer to over a one-month high touched earlier this Tuesday. The pair is seen trading just above mid-137.00s during the early North American session and looking to build on its recent upward trajectory witnessed over the past two weeks or so.

The US dollar hits a two-decade high amid hawkish Fed expectations, which turns out to be a key factor acting as a tailwind for the USD/JPY pair. Bullish traders further took cues from elevated US Treasury bond yields, resulting in the widening of the US-Japan rate differential and undermining the Japanese yen. This, along with the divergent Fed-Bank of Japan policy stance, supports prospects for a further near-term appreciating move.

Despite signs of easing US inflation, the recent hawkish remarks by several Fed officials suggested that the US central bank will continue to tighten its monetary policy to tame inflation. In contrast, the BoJ has repeatedly said that it will stick to its ultra-easy policy settings and 
remains committed to keeping the 10-year Japanese government bond yield around 0%. This, in turn, reaffirms the near-term positive outlook for the USD/JPY pair.

Traders, however, might refrain from placing aggressive bullish bets and prefer to wait for a more hawkish message from Fed Chair Jerome Powell at the Jackson Hole symposium on Friday. Traders will further take cues from this week's important US macro releases. The combination of factors will play a key role in influencing the near-term USD price dynamics and help determine the next leg of a directional move for the USD/JPY pair.

In the meantime, Tuesday's US economic docket - featuring the flash PMI prints, New Home Sales data and Richmond Manufacturing Index - will drive the USD demand. This, along with the US bond yields and the broader market risk sentiment, should provide some impetus to the USD/JPY pair and allow traders to grab short-term opportunities.

Technical levels to watch