USD/JPY nears its monthly low, bears await a sustained break below 127.00

• The global flight to safety buoyed the yen and caused some selling around USD/JPY.
• The decline in US bond yields proved to be another factor putting downward pressure.
• The emergence of dollar buying helped limit losses amid policy divergence between the Fed and the Bank of Japan.

The pair USD/JPY maintained its bid tone during the early North American session, although it has managed to bounce a few pips off the daily low. The pair was last seen trading around the 127.40-127.35 region, still down over 0.40% on the day.

The worsening global economic outlook continued to weigh on investor sentiment and triggered a new wave of risk aversion. This, in turn, boosted demand for traditional haven currencies, including the Japanese yen, and put downward pressure on the USD/JPY pair. The flow of risk aversion was reinforced by a further leg down in US Treasury yields, further inspiring bearish traders and dragging spot prices back towards the monthly low. .

However, the downward trend remains muted, at least for the moment, due to the appearance of some purchases of dollars at lower levels. Apart from this, the wide divergence in the monetary policy stance taken by the Bank of Japan (dovish) and the Fed (hawkish) helped the USD/JPY pair find some support ahead of the round 127.00 level. This, in turn, makes it prudent to wait for a strong selloff follow-up before positioning yourself for any further downside moves.

Market participants now await the US economic docket, in which May PMI data, new home sales and the Richmond manufacturing index will be released. This, coupled with Fed Chairman Jerome Powell’s speech and US bond yields, will influence dollar price action and provide some momentum to the USD/JPY pair. Traders will follow signals from broader market risk sentiment to take advantage of short-term opportunities.

Technical levels