- Risk appetite undermined the safe haven JPY and helped USD/JPY gain positive traction.
- Upside looks limited amid prevailing USD selling bias, warranting some caution from bulls.
- The Fed’s expected rate hike path and the recent drop in US bond yields weighed on the dollar.
The pair USD/JPY gained some positive traction on Monday and broke out of a multi-day trading range amid the risk-on mood, which tends to undermine the safe-haven Japanese yen. Intraday buying interest accelerated during the early hours of the American session and lifted the pair to a four-day high around the 127.80-127.85 area.
Investors were upbeat on the hope that the easing of COVID-19 lockdowns in China could boost the global economy, which was reflected in a generally positive tone around equity markets. Apart from this, the wide divergence in the monetary policy stance adopted by the Fed and the Bank of Japan weighed on the yen and lifted the USD/JPY pair.
However, the selling trend of the US dollar could prevent traders from making aggressive bullish bets and limit the gains of the USD/JPY pair. Traders continue to trim their long US dollar positions amid speculation that the Fed could pause the rate hike cycle after two hikes of 50 basis points each in June and July.
The prospect of an eventual slowdown in the Fed’s tightening policy was made clear by the recent drop in US Treasury yields, which hit a multi-week high. This could act as a dollar headwind and limit any significant upside for the USD/JPY pair amid relatively lighter trading volumes in the aftermath of the US Memorial Day holiday.
Additionally, investors may prefer to stay on the sidelines ahead of major US macroeconomic releases scheduled for the start of the new month, including the monthly US employment report (NFP) due out on Friday. Therefore, it will be prudent to wait for strong follow-on buying before confirming that the USD/JPY pair has formed a strong short-term base.
Technical levels
Source: Fx Street
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