• USD/JPY edged higher on Tuesday, albeit struggled to find acceptance above the 115.00 mark.
• The widening of the US-Japanese yield differential continued acting as a tailwind for the major.
• A softer risk tone benefitted the safe-haven JPY and kept a lid on any further gains for the pair.

The USD/JPY pair maintained its bid tone heading into the European session, albeit has retreated a few pips from the daily high and was last seen trading just below the 115.00 mark.

The pair built on its recovery from a multi-week low, around mid-113.00s touched in reaction to dismal US retail sales report on Friday and gained traction for the second straight day on Tuesday. A further widening of the US-Japanese government bond yield differential was seen as a key factor that acted as a tailwind for the USD/JPY pair.

In fact, the yield on the benchmark 10-year US government bond shot to the highest level since January 2022 amid growing acceptance that the Fed would start raising interest rates in March 2022. Conversely, the yield on the 10-year Japanese government bond remained near zero due to the Bank of Japan's yield curve control policy.

Meanwhile, a continual surge in the US bond yields underpinned the US dollar, which provided an additional lift to the USD/JPY pair. That said, an extended sell-off in the US money markets tempered investors' appetite for riskier assets. This, in turn, benefitted the safe-haven Japanese yen and capped the upside for the major.

The intraday movement seemed rather unaffected by the Bank of Japan's (BoJ) decision to leave interest rates steady at -0.10% at the end of its policy meeting on Tuesday. In the post-meeting press conference, the BoJ Governor Haruhiko Kuroda reiterated that the central bank will ease policy further without hesitation as needed.

The fundamental backdrop favours bullish traders and supports prospects for additional gains. Bulls, however, are likely to wait for a sustained strength beyond the key 115.00 psychological mark before positioning for a further near-term appreciating move. Traders now look forward to the Empire State Manufacturing Index for a fresh impetus.

Technical levels to watch