USD/JPY Price Analysis: Retreats from over a one-week high, downside seems limited

• USD/JPY witnesses a modest pullback from over a one-week high touched earlier this Monday.
• Retreating US bond yields keep the USD bulls on the defensive and act as a headwind for the pair.
• The Fed-BoJ policy divergence should help limit the downside amid a bullish technical setup.

The USD/JPY pair slips below the 135.00 mark during the early part of the European session, surrendering its modest intraday gains to over a one-week high set earlier this Monday.

Retreating US Treasury bond yields keep the US dollar bulls on the defensive, which, in turn, acts as a headwind for spot prices. That said, a big divergence in the monetary policy stance adopted by the Bank of Japan and the Federal Reserve should help limit deeper losses for the USD/JPY pair.

From a technical perspective, Friday's strong move up beyond the 50% Fibonacci Retracement level of the recent pullback from the 24-year high favours bullish traders. Hence, any meaningful pullback could be seen as a buying opportunity near the mid-134.00s and remain limited near the 134.00-133.90 area.

The latter coincides with the 38.2% Fibo. level, which if broken decisively would negate the near-term positive bias and make the USD/JPY pair vulnerable. Spot prices would then accelerate the fall towards the 133.00 mark before eventually dropping to the 132.50 area, or the 23.6% Fibo. level.

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

USD/JPY daily chart

Key levels to watch