The US dollar against the Japanese yen reaches its highest level in over five weeks on Tuesday before fluctuating between modest gains and small losses throughout the early European session. The pair trades in a tight range of 134.40-134.35, although positive fundamentals point to more rises shortly.

Selling pressure has halted the USD/JPY’s two-day recovery trend from last week’s annual low, creating a headwind for the pair. The greenback’s decline, however, should be constrained by persistent reports of an increase in Fed interest rates.

The likelihood of a further 25 basis point increase at the next Federal Open Market Committee (FOMC) meeting in May has risen as inflation expectations have risen. The New York Fed’s manufacturing index reached its highest level in five months on Monday. The Empire State Manufacturing Index increased to 10.8 in April from a revised -24.6 in March.

Both US dollar bulls and US Treasury bond yields benefit from this news. The rate gap between the US and Japan grows as the yield on 10-year US government bonds remains above a multi-week high. This, along with the BoJ’s dovish posture and an overall positive risk tone, helps to prop up the USD/JPY exchange rate.

Trade Idea

The recent persistent rise above the 50-day and 100-day Simple Moving Averages (SMAs) provides technical confirmation of the positive near-term outlook. Therefore, any pullback in the USD/JPY should be bought because the path of least resistance is higher. Early in the North American trading session, investors are awaiting data on the US domestic market.