- USD/JPY corrects sharply from a new multi-year high hit early this Friday.
- Modest USD weakness turns out to be a key factor motivating some profit-taking in the pair.
- Monetary policy divergence between the Fed and BoJ and high US bond yields help limit losses.
The pair USD/JPY has quickly recovered from the daily low of 121.16 and has climbed back towards the 122.00 level, being limited in this region. At time of writing, the pair trades at 121.61, shedding 0.60% on the day
The pair witnessed a intraday change from the 122.44 level, the highest level since December 2015 touched early this Friday, and reversed a significant portion of the previous day’s strong gains. The sharp pullback could be attributed solely to some profit taking amid extremely overbought conditions and modest US dollar weakness.
That said, a combination of factors helped limit deeper losses and helped the USD/JPY pair to attract some purchases near the 121.20-121.15 region. A positive tone around equity markets, coupled with the divergence in monetary policy outlooks between the Bank of Japan and the Fed, acted as a headwind for the safe-haven Japanese yen.
In fact, a number of influential members of the FOMC, including Fed Chairman Jerome Powell, left the door open for a further increase in borrowing costs to reduce unacceptably high inflation. The markets reacted quickly and began to value the possibility of a rate hike of 50 basis points at the next monetary policy meeting in May. This, in turn, pushed the benchmark 10-year US government bond yield closer to the 22-month high hit earlier this week.
By contrast, the Japanese 10-year bond yield remained anchored below the BoJ’s 0.25% ceiling amid the ultra-loose stance taken by the Japanese central bank. This, in turn, gave rise to a further widening of the bond yield spread between the United States and Japanwhich favors the bulls and supports the prospects for an extension of the strong uptrend in the USD/JPY pair.
However, for now it seems that the pair has broken five consecutive days of winning streak and remains at the mercy of the USD’s price dynamics. Market participants now await the US economic calendar, which includes the release of the revised Michigan Consumer Sentiment Index and pending home sales data at the start of the American session.
Aside from this, US bond yields will weigh on the USD and provide some momentum to the USD/JPY pair. Investors will take further cues from further developments around the Russia-Ukraine war, which will continue to play a key role in driving market risk sentiment and demand for traditional safe-haven assets, including the JPY.
USD/JPY technical levels
Source: Fx Street
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