- USD/JPY fell for the second day in a row and fell to a one-week low on Tuesday.
- The risk-off mood benefited the safe-haven JPY and put pressure on amid falling US bond yields.
- The technical set-up favors bearish traders, although the policy divergence between the Fed and the BoJ should limit losses.
The pair USD/JPY saw some selling for the second day in a row and fell to a one-week low during early trading on Tuesday. The pair remained depressed during the middle of the European session and was last seen trading just above 127.50.
The prevailing sentiment of risk aversion benefited the safe-haven Japanese yen and put downward pressure on the USD/JPY pair. Bearish traders followed further hints of falling US Treasury yields, although sustained US dollar buying should help limit any further losses.
From a technical perspective, the USD/JPY pair flirted with the 23.6% Fibonacci retracement level of the 121.28-129.41 surge. Such support coincides with the 200 hourly SMA, which, in turn, should now act as a pivotal point for short-term traders.
Given the overnight break through an uptrend line extending from the monthly low, the bias seems to be tilted in favor of the bears. Therefore, some follow-through selling would set the stage for a corrective pullback extension from the 129.40 area, or a fresh 20-year high.
The USD/JPY pair could then accelerate the decline and become vulnerable to weaken further below the 127.00 round level. The downward path could extend and drag the price to the next relevant support near the 126.35 area, or the 38.2% Fibonacci.
On the other hand, the 128.00 level now seems to act as an immediate resistance ahead of the rising trendline support breakout around the 128.20 area. Sustained strength beyond that will suggest the corrective decline has run its course and pave the way for further gains.
That said, any significant upside is likely to remain capped near 129.00 ahead of the Bank of Japan policy decision on Thursday. However, the policy divergence between the BoJ and the Fed should continue to act as a tailwind, suggesting that the slide could be seen as a buying opportunity.
USD/JPY 1 hour chart
Source: Fx Street
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