• USD/JPY struggles to gain any traction on Friday and remains confined in a range.
• Government intervention in the FX market underpins the JPY and caps the upside.
• Rising US bond yields, the Fed-BoJ policy divergence continues to extend support.

The USD/JPY pair struggles to capitalize on the previous day's late rebound from over a two-week low and oscillates in a range through the first half of trading on Friday. The pair is currently placed in neutral territory, around the 142.25 region and is influenced by a combination of diverging forces.

The Japanese yen continues to draw support from the fact that authorities intervened in the market for the first time since 1998 to stem the rapid decline in the domestic currency. Apart from this, the prevalent risk-off environment, amid growing recession fears, is underpinning the safe-haven JPY and acting as a headwind for the USD/JPY pair. That said, a strong US dollar helps limit the downside for spot prices, at least for the time being.

In fact, the USD Index, which measures the greenback's performance against a basket of currencies, remains pinned near a 20-year amid a modest hawkish stance adopted by the Federal Reserve. It is worth recalling that the US central bank signalled on Wednesday that it will likely undertake more aggressive rate increases to cap inflation. This remains supportive of a further rise in the US Treasury bond yields and continues to lend support to the buck.

The bank of Japan (BoJ), on the other hand, aggressively defended its yield curve ceiling and reaffirmed its commitment to ultra-low interest rates on Thursday. This results in the widening of the US-Japan rate differential and supports prospects for the emergence of fresh buying around the USD/JPY pair. It is worth mentioning that the Fed-BoJ policy divergence has been a key factor behind the yen's slump of over 25% against its USD since the beginning of 2022.

Nevertheless, the fundamental backdrop suggests that the path of least resistance for the USD/JPY pair is to the upside. Market participants now look forward to the release of the flash US PMI prints for a fresh impetus. This, along with the US bond yields and Fed Chair Jerome Powell's speech, will influence the USD. Apart from this, the broader risk sentiment might contribute to producing short-term trading opportunities on the last day of the week.

Technical levels to watch