The USD/JPY pair has seen a significant rebound in Asian trading, rising from 156.55 to 157.03 following a plunge to 155.70 overnight due to weaker-than-expected U.S. CPI data. This rebound is attributed to the market's perception of the Federal Reserve's stance, suggesting a "one-and-done" rate hike scenario for this year, thereby maintaining the wide interest rate differentials that favor the USD. This is especially relevant with the Bank of Japan (BOJ) expected to maintain its accommodative monetary policy stance in its upcoming meeting, further reinforcing the interest rate differential between the two currencies.

The current yield environment underscores this differential, with Japanese Government Bonds (JGBs) 10-year yields at 0.965% compared to U.S. Treasury yields of 4.750% for 2-year notes and 4.310% for 10-year notes. This yield disparity continues to attract investors towards the USD, providing support for the USD/JPY pair. Additionally, large option expiries between 156.00-156.80 and supportive bids from Japanese importers on dips provide further technical support for the currency pair.

Technically, USD/JPY has shown resilience, bouncing back into the hourly Ichimoku cloud, which currently provides resistance in the 157.05-157.06 range and peaks at 157.07-157.16. This cloud is expected to narrow sharply, potentially indicating a tighter trading range. Key moving averages also play a significant role in current trading dynamics, with the 55-hour moving average around 156.95 and the ascending 100-hour moving average at 156.75, offering further support levels. The kijun-sen, a component of the Ichimoku Kinko Hyo, stands at 156.50, aligning with broader market support levels.

Momentum indicators suggest a continuing bullish trend, albeit with caution. The 21-day Bollinger Bands have expanded, indicating increased volatility and a potentially strong trending market. However, a close below 1.0718/20, corresponding to the 61.8% Fibonacci retracement of the April-June rally and Tuesday's low, would suggest bearish signals. The pair's resilience above these levels indicates ongoing bullish sentiment.

Market sentiment remains cautiously optimistic about the USD/JPY pair, driven by the ongoing wide rate differentials and supportive technical indicators. The BOJ's anticipated decision to maintain its accommodative stance further supports the bullish outlook for the USD/JPY. However, the potential for increased volatility around key economic data releases, such as U.S. inflation data and Fed policy announcements, should not be underestimated.

In summary, the USD/JPY pair is positioned for continued gains, supported by favorable interest rate differentials and robust technical support levels. Investors should remain vigilant for any shifts in policy signals from the BOJ and the Fed, as these could introduce significant volatility and potential reversals in the current trend.

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