• USD/JPY consolidates its recent gains to a multi-week high touched earlier this Tuesday.
• A modest USD weakness turns out to be a key factor acting as a headwind for the major.
• Elevated US bond yields favour the USD bulls and help limit the downside for the pair.

The USD/JPY pair touches a nearly five-week high on Tuesday, albeit struggles to capitalize on the move and seesaws between tepid gains/minor losses through the early European session. The pair is currently placed around the 134.40-134.35 area, nearly unchanged for the day, though the fundamental backdrop seems tilted in favour of bullish traders and supports prospects for additional near-term gains.

The US Dollar (USD) comes under some selling pressure and stalls a two-day-old recovery trend from a one-year low touched last week, which, in turn, is seen acting as a headwind for the USD/JPY pair. That said, fresh speculations that the Federal Reserve (Fed) will continue raising interest rates should continue to lend some support to the Greenback and help limit the downside for the major, at least for the time being.

In fact, the markets are pricing in a greater chance of another 25 bps lift-off at the next FOMC meeting in May and the bets were lifted by a rise in short-term inflation expectations. Adding to this, the New York Fed reported on Monday that its barometer of manufacturing activity in the state increased for the first time in five months. In fact, the Empire State Manufacturing Index shot to 10.8 from -24.6 in March, beating estimates.

This, in turn, remains supportive of the elevated US Treasury bond yields and favours the USD bulls. In fact, the yield on the benchmark 10-year US government bond holds steady near a multi-week top, widening the US-Japan rate differential. This, along with the Bank of Japan's (BoJ) dovish outlook and a generally positive risk tone, undermines the safe-haven Japanese Yen (JPY) and lends support to the USD/JPY pair.

Even from a technical perspective, the recent sustained move beyond the 50-day and the 100-day Simple Moving Averages (SMAs) adds credence to the near-term positive outlook. This, in turn, suggests that the path of least resistance for the USD/JPY pair is to the upside and any corrective slide is likely to get bought into. Traders now look to the US housing market data for some impetus later during the early North American session.

Technical levels to watch