- A combination of supportive factors help USD/JPY reverse an initial drop below 129.00.
- Expectations of an aggressive Fed rate hike and rising US bond yields benefit the USD and the pair.
- A softer risk tone benefits the safe-haven JPY and could limit any significant upside.
The pair USD/JPY has managed to rally a few pips from the daily low and trades with modest losses around the region of 129.20 during the European session on Wednesday.
Investors continue concerned that more aggressive action by major central banks to curb inflation, the war between Russia and Ukraine, and the latest outbreak of COVID-19 in China could hurt economic growth world. This, in turn, triggered a further move lower in equity markets, benefiting the safe-haven Japanese yen and put some downward pressure on the USD/JPY pair. However, a combination of factors helped limit deeper losses, at least for now.
The markets seem convinced that the Fed will maintain its tightening policy in the coming months to curb rising inflation. Expectations were bolstered by Fed Chairman Jerome Powell’s remarks on Tuesday, in which he stated that would support interest rate hikes until prices start to fall towards a healthy level. This, in turn, pushed US Treasury yields higher, which revived the demand for US dollars and helped USD/JPY to reverse the initial decline below the 129.00 level.
Conversely, the Bank of Japan has promised to maintain its current ultra-loose policy and has promised unlimited bond-buying to defend its “near-zero” target for 10-year yields. The Resulting divergence between Fed and Bank of Japan monetary policy favors prospects for further near-term appreciation of the USD/JPY pair. However, the bulls seemed reluctant to open aggressive positions, suggesting that the pair may have already formed a short-term top around the 131.35 area.
Market participants are now waiting for the US housing market data to gain some momentum later in the early American session. In addition, US bond yields will influence the price dynamics of the dollar. Investors will be following signs of broader market risk sentiment to take advantage of some short-term opportunities around the USD/JPY pair.
USD/JPY technical levels
Source: Fx Street
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