USD/JPY Gives Back Major Part of Intraday Gains After Change in Risk Sentiment

• USD/JPY gains traction for the second day in a row, although the intraday rally runs out of steam near 136.35.
• The change in risk sentiment benefits the JPY as a safe haven and caps the pair’s upside.
• The divergence between the monetary policies of the Fed and the BoJ should limit the decline ahead of the release of the FOMC minutes on Wednesday.

The pair USD/JPY has struggled to take advantage of positive intraday movement and has encountered fresh selling near the 136.35 area on Tuesday. The pair has given back much of the early gains and has pulled back to the 135.70-135.65 zone during the first half of the European session.

Initial optimism, sparked by news that US President Joe Biden was leaning towards a decision to ease tariffs on goods from China, faded rather quickly. amid worsening economic outlook. Investors remain concerned that rapidly rising interest rates and tightening financial conditions will mean a challenge for global economic growth. Furthermore, the ongoing war between Russia and Ukraine and the outbreak of COVID-19 in China have fueled fears of a recession. This, in turn, caused a further decline in equity markets, which offered some support to the safe-haven Japanese yen.

The risk-off money flow dragged US Treasury yields back to a multi-week low hit on Friday, narrowing the US-Japan rate spread. This was seen as another factor that benefited the Japanese yen and acted as a headwind for the USD/JPY pair. Nevertheless, the downward trend continues to be supported by the divergence in monetary policy between the Bank of Japan and the Federal Reserve. It should be recalled that the Bank of Japan has repeatedly signaled that it will maintain its ultra-loose policy and has pledged to keep borrowing costs at “current or lower” levels.

Instead, Fed Chairman Jerome Powell last week reaffirmed expectations for more aggressive rate hikes, saying that the US economy is well positioned to handle tighter monetary policy. Therefore, the market’s focus will continue to be on Wednesday’s FOMC meeting minutes. Also, Friday’s release of the US monthly NFP employment report will influence short-term dollar price dynamics. This, in turn, should help determine the next directional move for the USD/JPY pair. In the meantime, investors may refrain from opening aggressive positions.

USD/JPY technical levels