- USD/JPY witnessed an intraday pullback from the new multi-year high reached on Wednesday.
- The crisis between Russia and the Ukraine boosted safe-haven flows into the JPY and exerted downward pressure.
- The Fed’s dovish outlook and elevated US bond yields should help limit any significant pullback.
The pair USD/JPY trimmed its intraday gains to a new multi-year high and pulled back to a daily low around the 120.70-120.65 area during the American session.
The pair continued its recent strong bullish trajectory seen over the past three weeks and gained strong follow-through traction during the first half of trading on Wednesday. The momentum carried the USD/JPY pair to the highest level since February 2016, although it lost steam near the 121.40 region amid revival in safe-haven demand.
Market sentiment remains fragile amid lack of progress in Russia-Ukraine peace talks. Italian Prime Minister Mario Draghi pointed out that Russia shows no interest in a truce for the success of the peace talks. Separately, Russian Foreign Minister Sergei Lavrov said talks with Ukraine are difficult as kyiv is constantly changing positions.
Incoming geopolitical headlines tempered investor appetite for assets perceived as riskier. This was evident from the modest intraday pullback in equity markets, which fueled some safe haven flows into the Japanese Yen and acted as a headwind for the USD/JPY pair. This, in turn, sparked some profit-taking amid extremely overbought conditions on short-term charts.
However, the downside remains cushioned amid the divergence in the monetary policy stance adopted by the Fed and the Bank of Japan. The Fed indicated last week that it could raise rates at the remaining six meetings in 2022. In addition, Fed Chairman Jerome Powell suggested that the US central bank could adopt a more aggressive policy to fight inflation. persistently high.
Markets already seem to have started to price in the possibility of a 50bp rate hike at the next FOMC meeting and pushed the benchmark 10-year US government bond yield to the highest level since 2019. By contrast, the Japanese 10-year bond remained anchored below the BoJ’s 0.25% ceiling amid the BoJ’s ultra-loose policy announced on the last day of last week.
The resulting widening of the US and Japanese bond yield spread should continue to support the USD/JPY pair, warranting some caution before confirming a near-term top. In the absence of any relevant economic data, traders will continue to track developments surrounding the Russia-Ukraine saga. This, coupled with US bond yields, should create some opportunities.
Technical levels
Source: Fx Street
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