USD/JPY steadily climbs back above 137.00 mark amid renewed USD buying interest

The USD/JPY pair attracts fresh buying on Friday and climbs back to the 137.00 mark during the early European session, reversing the previous day's losses.

The US dollar builds on the overnight bounce from the weekly low and gains some traction on the last day of the week, which, in turn, is seen lending some support to the USD/JPY pair. Firming expectations that the Fed will tighten its policy further to tame inflation continues to underpin the buck. The bets were reaffirmed by upbeat US macro data and hawkish remarks by Fed officials on Thursday.

In fact, St. Louis Fed chief James Bullard stressed the need to keep raising interest rates. Adding to this, Kansas City Fed President Esther George said the Fed hasn’t yet raised rates to levels that weigh on the economy and may have to take them above 4% for a time. Policymakers, however, reserved their judgment on the size of the rate increase at the next FOMC policy meeting in September.

Nevertheless, the markets are still pricing in a greater chance of a supersized 75 bps rate hike. In contrast, the Bank of Japan is expected to retain its ultra-easy policy stance, marking a big divergence in comparison to a more hawkish Fed. This, along with a generally positive tone around the equity markets, undermines the safe-haven Japanese yen and contributes to the USD/JPY pair's move up.

The fundamental backdrop supports prospects for a further near-term appreciating move. That said, bulls might refrain from placing aggressive bets and prefer to wait for a more hawkish message from Fed Chair Jerome Powell at the Jackson Hole Symposium. Ahead of the key event risk, traders might take cues from the release of the US PCE data, due later during the early North American session.

Technical levels to watch