USD/JPY retakes 136.00 as hawkish remarks by Fed’s Mester help revive USD demand

• USD/JPY reverses an intraday dip amid the emergence of some USD dip-buying on Tuesday.
• Hawkish remarks by Fed’s Mester lift bets for additional rate hikes and boosts the Greenback.
• A softer risk tone could underpin the safe-haven JPY and cap any further gains for the major.

The USD/JPY pair attracts some dip-buying on Tuesday and move back above the 136.00 mark during the early North American session, closer to a one-and-half-week high touched the previous day.

The US Dollar (USD) recovers its intraday losses in reaction to hawkish remarks by Cleveland Federal Reserve President Loretta Mester and turns out to be a key factor lending support to the USD/JPY pair. Mester said that interest rates are not at a sufficiently restrictive level and that the central bank isn't at the spot to hold rates yet. This, in turn, triggers a sharp intraday rise in the US Treasury bond yields and acts as a tailwind for the Greenback, overshadowing the mixed US Retail Sales figures.

The US Census Bureau reported that the headline US Retail Sales rose 0.4% MoM in April as compared to consensus estimates for a reading of 0.8%. Meanwhile, sales excluding automobiles registered a modest 0.4% growth during the reported month, as anticipated. The positive surprise came from Retail Sales Control Group, which recorded a solid rebound from the previous month's 0.4% downfall and increased by 0.7% during the reported month, surpassing market expectations for a flat reading.

This, along with a more dovish stance adopted by the Bank of Japan (BoJ), continues to undermine the Japanese Yen (JPY) and further contributes to the USD/JPY pair's intraday bounce. It is worth recalling that BoJ Governor Kazuo Ueda said last week that it was too early to discuss specific plans for an exit from the massive stimulus program. That said, a generally weaker toen around the equity markets could benefit the JPY's relative safe-haven status and cap any meaningful gains for the major.

Against the backdrop of concerns about the US debt ceiling, weaker-than-expected Chinese macro data fuels recession fears and tempers investors' appetite for riskier assets. Nevertheless, the fundamental backdrop seems tilted in favour of bullish traders and suggests that the path of least resistance for the USD/JPY pair is to the upside. Hence, a subsequent move up towards testing the 200-day Simple Moving Average (SMA), currently around the 137.00 round-figure mark, looks like a distinct possibility.

Technical levels to watch