• USD/JPY oscillates in a narrow trading band below a fresh 32-year high touched this Monday.
• Retreating US bond yields prompts some USD selling and acts as a headwind for the major.
• The Fed-BoJ policy divergence, the risk-on impulse undermines the JPY and offers support.

The USD/JPY pair consolidates its recent strong gains to the highest level since 1990 and oscillates in a range below the 149.00 mark through the early North American session.

The US dollar struggles to capitalize on Friday's strong move up and meets with a fresh supply on the first day of a new week, which, in turn, is seen acting as a headwind for the USD/JPY pair. The USD downtick could be attributed to a modest pullback in the US Treasury bond yields. This results in the narrowing of the US-Japan rate differential, which extends some support to the Japanese yen and further contributes to capping the major.

The downside, however, remains cushioned amid the risk-on impulse, which is seen undermining the safe-haven JPY. The market sentiment gets a strong boost in reaction to the new UK government's U-turn on planned tax cuts. Apart from this, the prospects for a more aggressive policy tightening by the Fed should help limit the downside for the US bond yields and the USD. This, in turn, should continue to lend some support to the USD/JPY pair.

In fact, the markets have priced in a nearly 100% chance for another supersized 75 bps Fed rate hike move for the fourth consecutive meeting in November. The bets were reaffirmed by the stronger US CPI report released last week and the recent hawkish comments by several Fed officials. In contrast, the Bank of Japan remains committed to continuing with its monetary easing, marking a big divergence in comparison to a more hawkish Fed.

This, in turn, adds credence to the near-term positive outlook for the USD/JPY pair and suggests that the path of least resistance for spot prices is to the upside. That said, speculations that Japanese authorities might intervene in the markets to stem any further weakness in the domestic currency warrant caution for bullish traders.

Technical levels to watch