- A combination of factors drags USD/JPY lower for the third day in a row on Thursday.
- Fading hopes for a diplomatic solution in Ukraine benefits the JPY and puts downward pressure on the pair.
- A pullback in US bond yields keeps USD bulls on the defensive and contributes to the pair’s decline.
The pair USD/JPY moves lower early in the European session on Thursday and falls to a new daily low at 121.33. At time of writing, the pair recovers slightly and trades at 121.46, still down -0.30% on the day.
The pair struggled to capitalize on its modest intraday rally and found new sales near 122.50 Thursday, turning down for the third day in a row. The speculation that BoJ officials were uneasy and would respond to recent Japanese yen weakness It turned out to be a key factor that acted as a headwind for the USD/JPY pair.
What’s more, incoming geopolitical news dashed hopes for a diplomatic solution to end the war in Ukraine and further benefited the safe-haven Japanese yen. The pair’s bears took further indications from the continued decline in US Treasury bond yieldswhich weighed on the US dollar and put downward pressure on the USD/JPY pair, although this pullback remains supported.
The markets seem convinced that the Fed will tighten its monetary policy at a faster pace and make a rate hike of 50 basis points in the next two meetings to combat high inflation. On the contrary, it is expected that the Bank of Japan maintained its ultra-loose policy for an extended period. This divergence in monetary policies between the Fed and the BoJ supports the prospects of the appearance of some buying at lower levels in the USD/JPY pair..
The fundamental backdrop makes it prudent to wait for a strong continuation sell below the weekly low, around the 121.20-121.15 region, before confirming that the USD/JPY pair has established a temporary high. This would set the stage for an extension of the sharp pullback from just above the psychological level of 125.00, or the highest level since August 2015 touched earlier this week.
Market participants are now awaiting the US economic calendar, highlighted by the publication of the core PCE price index, the Fed’s preferred indicator of inflation. The focus, however, will continue to be on new developments around the war between Russia and Ukraine. Incoming geopolitical news will influence market risk sentiment and could provide some lift to the USD/JPY pair.
USD/JPY technical levels
Source: Fx Street
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