USD/JPY bounces off daily low, shows some resistance below 136.00 level

• USD/JPY sees some selling on Thursday and pulls back from 24-year highs.
• Recession fears and risk aversion sentiment are benefiting the safe haven yen and putting some pressure on the pair.
• Falling US bond yields are keeping dollar bulls on the defensive and contributing to the pair’s selling bias.
• The divergence between the monetary policies of the Fed and the Bank of Japan helps limit losses and supports the prospects of some purchases at lower levels.

The pair USD/JPY sees some selling on Thursday and breaks a four-day gain streak to hit its highest level since September 1998, around the 137.00 level touched the previous day. The pair has remained under pressure during the first half of the European session, although it has shown resistance below the 136.00 level and has now recovered a few pips from the daily low of 135.95.

Investors are followed worrying that rapidly rising interest rates and tightening financial conditions pose a challenge to economic growth world. This was evident in risk-off sentiment and benefited the safe-haven Japanese yen. The flow of risk aversion, along with the fear of a recessiondragged down US Treasury yields, keeping dollar bulls on the defensive and putting downward pressure on the USD/JPY pair.

Said that, the divergence between the policies adopted by the Fed and the Bank of Japan acted as a tailwind for USD/JPY. Speaking at the ECB’s annual forum on Wednesday, Fed Chairman Jerome Powell reaffirmed expectations for more aggressive rate hikes and said the US economy is well positioned to handle tighter policy. Powell added that the Fed remains focused on getting inflation under control and market prices are pretty close to the dotted chart.

Instead, the Bank of Japan has indicated that it will maintain its ultra-accommodative policy and has reiterated its orientation to maintain financing costs at “current or lower” levels. The Japanese central bank had also pledged to guide the 10-year yield around 0% and to intervene to prevent rates from rising. This, in turn, helped limit any further losses and helped the USD/JPY pair bounce around 25-30 points from the daily low.

Market participants now await the US economic docket, in which the core PCE price index (the Fed’s preferred gauge of inflation) and the usual weekly initial jobless claims will be released. Aside from this, US bond yields, dollar price action and broader risk sentiment should give the USD/JPY pair some lift. However, the fundamental background seems to continue to lean strongly in favor of the bulls.

USD/JPY technical levels