USD/JPY holds above 137.00 mark, flirts with multi-week high amid bullish USD

• USD/JPY gains traction for the fifth straight day and climbs to a nearly four-week high on Monday.
• The Fed-BoJ policy divergence, elevated US bond yields, sustained USD buying remain supportive.
• Recession fears, the risk-off impulse benefit the safe-haven JPY and seem to cap gains for the pair.

The USD/JPY pair reverses an intraday dip to the 136.70 area and now seems headed back to a three-and-half-week high touched earlier this Monday. The pair holds on to its positive bias for the fifth successive day and is seen trading above the 137.00 mark during the early North American session.

A big divergence in the monetary policy stance adopted by the Bank of Japan and the Federal Reserve turns out to be a key factor acting as a tailwind for the USD/JPY pair. It is worth recalling that the BoJ has repeatedly said that it would retain its ultra-easy policy settings. In contrast, the recent hawkish comments by several Fed officials reaffirmed market expectations that the US central bank would continue to tighten its monetary policy to tame inflation.

The prospects for a further interest rate hike by the Fed remain supportive of elevated US Treasury bond yields, widening the US-Japan rate differential and further weighing on the Japanese yen. In fact, the yield on the benchmark 10-year US government bond is hovering around the 3.0% threshold. This, in turn, pushes the USD to its highest level since mid-July and provides an additional lift to the USD/JPY pair, contributing to the ongoing positive move.

That said, the prevalent risk-off environment offers some support to the safe-haven JPY and caps any further gains for spot prices, at least for the time being. Investors might also prefer to wait for Fed Chair Jerome Powell's speech at the Jackson Hole Symposium on Friday, which will be scrutinized for hints about a 75 bps rate hike move at the September meeting. This will play a key role in influencing the USD and provide a fresh directional impetus to the USD/JPY pair.

Apart from this, investors this week would further take cues from important US macroeconomic releases. In the meantime, traders are likely to refrain from placing aggressive bullish bets amid absent relevant market-moving US economic data on Monday. Nevertheless, the fundamental backdrop remains tilted in favour of bulls and supports prospects for an extension of the recent appreciating move witnessed over the past one-and-a-half week or so.

Technical levels to watch