• USD/JPY gained some positive traction on Tuesday, albeit lacked bullish conviction.
• The cautious market mood underpinned the safe-haven JPY and acted as a headwind.
• Retreating US bond yields weighed on the USD and collaborated to cap the upside.

The USD/JPY pair trimmed a part of its modest intraday gains and was last seen trading just a few pips above the daily low, around the 115.20-25 area heading into the European session.

Having defended the key 115.00 psychological mark, the USD/JPY pair attracted some buying during the early part of the trading on Tuesday, though a combination of factors capped the upside. The US dollar struggled to capitalize on the overnight positive move amid retreating US Treasury bond yields. Apart from this, the cautious market mood benefitted the safe-haven Japanese yen and kept a lid on any meaningful gains for the major.

That said, the prospects for a faster policy tightening by the Fed might continue to act as a tailwind for the US bond yields and the buck. In fact, the money markets have fully priced in the possibility of an eventual Fed lift-off in March and are anticipating four interest rate hikes by the end of 2022. Hence, the market focus will remain glued to Fed Chair Jerome Powell's nomination hearing, due later during the US session on Tuesday.

Apart from this, the release of the latest US consumer inflation figures on Wednesday will be looked upon for fresh clues on the timing and pace of policy normalisation by the Fed. This will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the USD/JPY pair. In the meantime, the US bond yields and the broader market risk sentiment might produce some short-term trading opportunities.

Technical levels to watch