USD/JPY Price Analysis: Pullback from 1-week highs, downside looks limited

• The USD/JPY pair has seen a modest pullback from the one-week highs reached this Monday.
• Pullback in US bond yields keeps dollar bulls on the defensive and acts as a headwind for the pair.
• The divergence in policy from the Fed and the Bank of Japan should help limit the decline amid a bullish technical setup.

The pair USD/JPY dips below 135.00 during the early European session, paring modest intraday gains to one-week highs set earlier this Monday.

Pullback in US Treasury yields is keeping dollar bulls on the defensive which, in turn, acts as a headwind for the pair. However, a wide divergence in the monetary policy adopted by the Bank of Japan and the Federal Reserve should help limit deeper losses for the USD/JPY pair.

Technically, Friday’s sharp rally beyond the 50% Fibonacci retracement level of the recent retracement from the 24-year high favors the bullish traders. Therefore, any significant pullback could be seen as a buying opportunity near 134.50 and remain capped near the 134.00-133.90 area.

The latter coincides with the 38.2% Fibonacci level, which if broken decisively would nullify the short-term positive bias and make the USD/JPY pair vulnerable. Spot prices would accelerate the decline towards 133.00 before finally falling to the 132.50 area, or the 23.6% Fibonacci level.

Spot prices, meanwhile, have been struggling to find acceptance above the 50-day SMA. This makes it prudent to wait for any follow-through buying beyond the 135.50-135.60 area, or the daily high, before positioning for further gains towards the 61.8% Fibonacci level, on around 136.00. Sustained strength beyond that would be seen as a new trigger for the bulls and has the potential to lift the pair towards the intermediate hurdle of 136.65 en route to the 137.00 and 137.45 region.

USD/JPY daily chart

Technical levels