USD / JPY cannot stay above the 50 DMA at 113.20 as US yields remain bearish

• Following aggressive remarks from Fed Chairman Powell, USD / JPY tried to rally towards 114.00 on Tuesday, but momentum waned.
• The pair is now back below its DMA at 113.20 as long-duration US yields remain subdued.

The USD/JPY it was oscillating on Tuesday, rising to 113.60 on the heels of aggressive comments from Fed Chairman Jerome Powell from previous lows below 112.60, before retreating to 113.00 more recently. That means the pair is on track to post daily losses of 0.3%.

USD / JPY’s inability to rally to Monday’s highs near 114.00 and the 21-day moving average just above it is a sign that bullish momentum is weak for now. That suggests that the 50 DMA at 113.20, which was support as recently as last Friday and Monday, may continue to limit price action, or at least act as a magnet for it. Now that prices have fallen below their previous monthly lows to 112.50, a pullback towards the 112.00 level could be in play, provided the recent downward momentum in government bond yields is not reversed. USA

Performance update

As is often the case, USD / JPY price action on Tuesday was largely driven by fluctuations in US bond yields and their impact on rate spreads between the United States and Japan. The US yield curve saw a noticeable flattening to the upside on Tuesday, with the 2-year yield actually climbing around 2 basis points on the day to around 0.52%, the 10-year yields falling nearly 9 basis points. to 1.44% after hitting its lowest level since September. 30-year yields, meanwhile, fell more than 9 basis points below 1.80% and hit their lowest level since January this year.

While the aggressive message from Fed Chairman Powell gave a lasting boost to short-term returns, the boost to longer-term returns quickly faded. Traders cited concerns that the Fed will become more aggressive at a time when the economic outlook is unusually unclear given the uncertainties related to the Omicron variant as one reason the longer duration US bonds were able to sustain a supply of decent safe haven.

USD / JPY tends to be more sensitive to longer-term bond rate spreads, so if 10-year and 30-year yields make major breakouts to the downside, this would hit the pair a lot. The risk of new safe-haven offerings in long-term US bonds in the wake of more bad news on the Covid-19 – Ómicron front remains high.

Technical levels