- USD/JPY finds some selling on Thursday and pulls back further from a two-decade high.
- The current corrective pullback in the USD is seen as a key factor putting downward pressure on the pair.
- Monetary policy divergence between Fed and BoJ and risk appetite weigh on JPY and help limit pair’s losses.
The pair USD/JPY has managed to recover around 35 pips from the daily low and trades with modest losses around the 125.40 region during the European session on Thursday.
The pair moved lower during the first part of Thursday and moved away from its highest level since 2002, around the 126.30 region, touched the previous day. The US dollar index DXY continued its decline from an almost two-year high, which in turn put some downward pressure on the USD/JPY pair.
The US consumer inflation figures released on Tuesday were not as bad as the markets feared and forced US Treasury yields to halt their recent rally to a multi-year high. This was seen as a key factor that prompted investors to relax some of their bullish positions on the dollar and acted as a headwind for the USD/JPY pair.
Having said that, a combination of factors helped limit losses and find some support near the psychological level of 125.00. Risk appetite, as represented by a positive tone around equity markets, weighed on demand for traditional safe-haven assets and capped Japanese yen gains.
Apart from this, the growing divergence of monetary policies between the Bank of Japan and the Fed prevented investors from opening aggressive bearish positions around the USD/JPY pair. The Governor of the BoJ, Haruhiko Kuroda reiterated on Tuesday to maintain the current powerful easing to support an economy that has not yet recovered to pre-pandemic levels.
On the other hand, the Fed is expected to tighten monetary policy at a faster pace to curb rising inflation. Expectations were bolstered by US PPI producer price inflation, which could put upward pressure on already high inflation. This, in turn, should support the USD.
The basic backdrop seems heavily tilted in favor of the bulls and supports the prospects for an extension of the recent move to the rise of the USD/JPY pair in the last month. That said, overbought oscillators warrant some caution amid fading hopes for a diplomatic solution to end the war in Ukraine.
Market participants now await the US economic calendar, which includes monthly retail sales data, weekly initial jobless claims and Michigan’s preliminary consumer sentiment index. This coupled with US bond yields will weigh on the USD and could create some opportunities around the USD/JPY pair.
USD/JPY technical levels
Source: Fx Street
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