- USD/JPY continues to lose ground for the third day in a row and falls to a new weekly low.
- Risk-off sentiment benefited the safe-haven JPY and puts pressure on the pair amid retreating bond yields.
- The Fed’s bullish expectations act as a tailwind for the USD and help limit any further losses.
The pair USD/JPY moves lower during the European session on Friday, although it has managed to recover some pips since the weekly low set earlier in the day near 113.60. At time of writing, the pair recovers towards 113.94, still down -0.23% on the day.
The pair extended this week’s rejection drop from the key psychological level of 115.00 and witnessed some continuation selling for the third day in a row on Friday. The downward move dragged the USD/JPY pair back near the monthly low and is due to a combination of factors.
The concerns that rising borrowing costs could weigh on earnings prospects for companies they tempered investors’ appetite for perceived higher-risk assets. This was evident from a weaker tone around equity markets, forcing investors to take refuge in safe-haven currencies such as the Japanese yen.
The pair’s bears took further indications from the current retracement drop in US Treasury bond yields from multi-year highs, weighing on the US dollar. That said, the prospects for faster Fed tightening acted as a tailwind for the USD and helped limit losses for the USD/JPY.
Investors seem convinced that the Fed would start raising interest rates in March to combat stubbornly high inflation and have been pricing in the possibility of a total of four rate hikes in 2022. Therefore, the market focus will remain glued to the next FOMC monetary policy meeting on January 25-26.
The result will be scrutinized for new clues and clearer signals about when the Fed is likely to start its rate hike cycle. This, in turn, will play a key role in influencing short-term USD price action and helping determine the next directional move for the USD/JPY pair.
Meanwhile, US bond yields will boost demand around the dollar. Aside from this, investors will take cues from broader market risk sentiment to take advantage of some short-term opportunities around the USD/JPY pair amid the absence of any relevant economic releases from the US on Friday.
USD/JPY technical levels
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