Bears take control due to falling US yields.

• USD / JPY bears are taking over as the US dollar struggles at the beginning of the week.
• The bulls need to break above 110.60 and the 61.8% confluence.

At the time of writing this article, the USD/JPY it was modestly down for the day so far at 110.34, but has recovered from the day’s lows at 110.11.

The pair fell from the 110.58 high on a weak US dollar ahead of the Federal Open Market Committee meeting this week.

At times like this, the bond market is usually a reliable indicator of market sentiment. Given the drop in US nominal and real rates at the start of the week, investors are potentially weighing the spread of the delta coronavirus variant against the prospect of stubbornly higher inflation.

” Real 10-year US yields fell to a record low of -1.13% before recovering to -1.10%, ” Brown Brothers Harriman analysts noted, arguing that “conflicting narratives will make the job the Fed gets even more complicated as you go through this week. ”

With inflation rising beyond what we would consider transitory, we expect the Fed to continue to tiptoe down the path of reduction. However, it will be even more difficult for Powell and Co. given growing concerns about the economic outlook, ” the analysts explained.

However, analysts argued that those concerns are overblown.

“While the recent surge in infections in the United States is concerning, the relatively high vaccination rates in the country’s major economic centers suggest that the risks to growth from potential lockdowns remain low, at least for now.”

However, the DXY dollar index, which measures the currency against six major pairs, fell 0.40% to 92,531, but was still close to last week’s 3 1/2 month high of 93,194 and analysts expected it to finally test. the March 31 high near 93,437.

The US dollar has gained nearly 4% since May 25, as the improving US economy bolstered prospects for the Federal Reserve to begin reducing asset purchases starting this year.

It could be argued that the dollar has been on a hot streak of late and looks a bit rich against some of the currencies whose nation’s central banks are more on the aggressive side of the line.

That said, the FOMC’s confirmation that it intends to make a reduction announcement could serve to lift the US dollar immersed in the reality of US monetary policy divergence.

Significantly, a press conference by President Jerome Powell on Wednesday, where investors will be watching for any comments on when the reduction in central bank asset purchases could begin, could be a volatile affair.

On the other hand, a good result for stocks, whereby the Federal Reserve recognizes continued economic improvements and a steady pace of recovery, but is hesitant to reduce it in the face of the most contagious variant of the Delta coronavirus, could negatively affect the dollar.

Daily infections have quadrupled to levels approaching those seen in last summer’s virus surge.

In general, however, the US dollar smile theory has so far developed regardless of the risks of the variant.

The US dollar smile theory at stake

That is, the US dollar will strengthen when the US economy recovers and while the Fed is on the verge of a decline.

However, contrary to intuition, it will also increase due to risk aversion despite the risks to the economy in the implications of the spread variant.

USD / JPY technical analysis

USD / JPY is trading lower after failing to take advantage of its recent gains at 110.60 last month.

A break above 110.65 is needed to establish a test of the July 2 high near 111.65 and then towards 112.40.

Failed to break the confluence with the 61.8% Fib retracement of the weekly bullish correction at 110.68, there are prospects for a significant bearish extension.

The bears will look toward a test of the mid-July lows and 109.