USD/JPY: Dip demand to remain in play ahead of NFP

The USD/JPY pair is locked in a tight range since the beginning of this month, with every downside attempt restricted by rising US treasury yields, while upside finds sellers in wake of persistent risk-off trades. Hence, the major continues to waver in a 120-pips range, well below 115 handle.

So basically, there are two factors in play that drive the USD/JPY moves, the most prominent being rising March Fed rate hike bets, which continue to underpin the sentiment around the treasury yields across the curve, boosting the bids for the greenback versus its main competitors.

Fed funds futures pricing shows traders see around an 85% chance of a rate increase this month, up from just a one-in-three chance early last week, according to CME Group's Fed Watch tool.

Meanwhile, recent news of the North Korean missiles launch combined with today’s China trade deficit shock spooks markets, with investors run for cover in the safe-haven yen.

However, every pullback in USD/JPY near 113.50 levels is being bought, driving the rate back above 114 handle, as increased odds of a March Fed rate hike brings monetary policy divergence between the Fed and BOJ back to the fore.

Looking ahead, the US jobs report due out on Friday is expected to play a key determinant to seal in a March Fed rate hike deal, and hence, markets believe buying the spot on every dip.

In terms of technicals, the major finds immediate resistance at 114.20/24 (Classic R1/ Fib R2). A break above the last, the major could test 114.67/77/78 (classic R3/ Mar 3 high) and 114.97/115 (Feb 15 high/ psychological levels) beyond the last. While to the downside, the immediate support is seen at 113.59/54 (50 & 10-DMA) next at 113.06/113 (Feb 16 low/ zero figure) and below that at 112.75/71 (Feb 20 & Mar 1 low).