USD/JPY remains in a tight range as Tokyo returns from a holiday, with the pair trading cautiously ahead of key events later this week. The dollar-yen pair has been closely tracking movements in U.S. Treasury yields, which rose following the release of S&P flash PMI data. While the services sector exceeded expectations, manufacturing disappointed, highlighting a mixed outlook for the U.S. economy. Dovish comments from multiple Federal Reserve officials, including Raphael Bostic and Neal Kashkari, have reinforced market expectations for at least two more 25 basis point rate cuts by the end of the year. These rate cut expectations are flattening the Treasury yield curve, and as long as U.S. data hovers near forecasts, USD/JPY is likely to remain range-bound as volatility declines.

Technically, USD/JPY is facing significant resistance at the 145.55 level, which represents the September 4 high, while support is seen at the September 6 low of 141.75. The pair may test these levels later this week, especially with key U.S. Personal Consumption Expenditures (PCE) data and portfolio flows coming into focus. One-week options are being considered to hedge against potential volatility stemming from the upcoming Liberal Democratic Party (LDP) leadership election and Tokyo's CPI data. A close above 145.55 could open the door to further gains, potentially targeting the September high of 147.20, while a break below 141.75 would bring the year-to-date low of 139.58 into play. However, subdued trading volumes in the pair, especially ahead of Tokyo's return, suggest that any significant breakout may be delayed until later in the week.

Looking ahead, the broader risk sentiment is expected to drive USD/JPY’s movements. The improving risk tone, driven by expectations of further Fed easing, is undermining demand for haven currencies like the yen. With volatility continuing to slide, the pair is likely to remain range-bound in the short term, though upcoming data and events could trigger a breakout in either direction. Investors will closely watch U.S. PCE data, Tokyo's September CPI, and the outcome of the LDP elections for clues on where the pair might head next. The slide in one-week volatility to 10.5% reflects market anticipation of relatively contained movements, though quarter-end flows could introduce unexpected price swings.