USD/JPY cuts gains and returns below 132.00

• USD/JPY rebounds to 125 pips from the daily low, although the intraday bounce loses strength.
• A generally positive risk tone weakens the yen.
• Dollar weakness limits USD/JPY gains and calls for caution.

The pair USD/JPY managed to find buyers after falling to the 131.30 zone on Monday and rebounded to 132.65, reaching a new daily high during the European session, although it could not rise further and lost strength. The pair, however, remains slightly positive heading into the North American session and is currently positioned around the 132.30 area.

The broadly positive tone in equity markets weakens the Japanese Yen and provides some support for the USD/JPY pair. Global risk sentiment is boosted by the biggest turnaround from China, which continues to move away from its zero-COVID policy. Indeed, China opened its borders over the weekend for the first time in three years, though concerns about a deeper global economic downturn limit optimism.

Apart from this, the predominance of the selling trend of the US dollar, in the midst of the growing bets for a less aggressive tightening of the policy of the Federal Reserve, acts as a headwind for the USD/JPY pair. The mixed US jobs report (NFP) on Friday and the disappointing release of the US ISM services PMI fueled speculation that the US central bank will soften its hawkish stance. Furthermore, markets are turning towards a 25 basis point hike for the next FOMC policy meeting in February.

Apart from this, recent reports that the bank of japan plans to raise its inflation forecasts could support the yen and help cap the USD/JPY pair. This, in turn, suggests that the path of least resistance for prices is down. Therefore, recovery attempts could be seen as a selling opportunity and remain limited, at least for now, in the absence of relevant US macroeconomic data.

technical levels