US equities made significant headway on Monday with the S&P 500 index gaining 1.2% to trade above the 2,900 level. US Treasuries initially declined sharply on Monday with the 10-year yield pushing to the 1.625% area, but selling pressure eased during the day with the yield drifting back towards 1.60%.

There were relatively hawkish comments from Boston Fed President Rosengren on Monday as he warned against agressive easing monetary policy amid the lack of significant problems. He was also concerned over the risks to financial stability and that it was better to sit back and wait for the data.

The comments illustrated that that there will be important divisions within the Federal Reserve Open Market Committee at the September policy meeting.

The dollar overall held a firm tone with the trade-weighted index posting 2-week highs. USD/JPY peaked at 106.70, but failed to secure a break of key resistance around 106.75 and drifted lower.

USD/JPY also failed to make headway in Asia on Tuesday with a retreat to just below 106.50 in early Europe while EUR/JPY dipped back below 118.00.

USD/JPY's inability to advance during a period of firmer risk appetite is a potentially important warning sign as US-China trade tensions continue to dent underlying sentiment. The markets are anticipating a speech by Fed Chair Powell at the annual symposium in Jackson Hole on Friday.

Dovish rhetoric from Jerome Powell would support risk appetite, but would also undermine US yield support. In contrast, more hawkish rhetoric would cause a slide in asset prices which would trigger further defensive flows into the Japanese yen.

The Hong Kong political situation will also be monitored closely. Any direct intervention by Chinese forces is likely to trigger a spike in yen demand.