USD / JPY recovers initial losses and rises back above 113.50

• USD / JPY attracts some buying near the 113.35 region, although it lacks tracking.
• High US bond yields extend some support to the pair; modest USD weakness limits gains.
• The focus is now on the US CPI report and FOMC minutes for new directional momentum.

The pair USD / JPY has recovered from an intraday decline and has risen above 113.50, near the upper end of its daily trading range, during the European session.

The pair has captured some buying at lower levels on Wednesday and has recovered more than 25 pips from daily lows, around the 113.35 region, although it has lacked a strong following. The recent widening of the government bond yield spread between the United States and Japan has been seen as a key factor that has pushed money flows away from the Japanese yen and has offered some support to the USD / JPY pair.

US bond yields have been rebounding since late September, when the Fed signaled that it would begin reducing its bond purchases by the end of 2021. In fact, the benchmark 10-year US government bond yield spiked to four-month highs on Friday. On the other hand, the Bank of Japan’s yield curve control policy has kept the yield on the Japanese 10-year government bond close to zero.

Markets may also have started to price the price possibility of an interest rate hike in 2022 to counteract the risk of inflation becoming too high. This has been seen as another factor that has pushed bond yields higher. That said, a modest US dollar weakness has limited any further gains for the USD / JPY amid softer risk tone, which tends to benefit the safe-haven JPY.

Concerns that a general rebound in commodity prices will fuel inflationAlong with signs of a global economic slowdown, they have been fueling speculation about a return to stagflation. Aside from this, fears of contagion from the Evergrand debt crisis in China have weighed on investor sentiment. This has been evident from the prevailing sentiment of caution around the global stock markets.

Apart from this, the overbought conditions on the short-term charts could further prevent the bulls from opening aggressive positions around the USD / JPY pair. Investors are now awaiting the release of US consumer inflation figures and the minutes of the FOMC’s monetary policy meeting to gauge the Fed’s path to normalizing monetary policy.

This will play a key role in influencing the short-term USD price dynamics. This, along with broader market risk sentiment, should determine the pair’s next directional move.

USD / JPY technical levels