- Risk appetite undermined safe haven yen and extended USD/JPY support on Monday.
- The prevailing selling bias around the dollar prevented the bulls from making further bets and capped gains.
- The expectation that the Fed will pause the rate hike cycle later this year weighed on the USD.
The pair USD/JPY it gained some positive traction on Monday and maintained its modest intraday gains through the first half of the European session. The pair last traded around the 127.25-127.30 zone, up 0.15% on the day.
Investors were bullish on the hope that the easing of COVID-19 restrictions in China would boost the global economy, which was evident in the current rally in risk in equity markets. This, in turn, undermined demand for the safe-haven Japanese yen and acted as a tailwind for the USD/JPY pair, although the US dollar’s selloff prevented any significant gains.
Markets are now expecting the Federal Reserve to pause the rate hike cycle after two hikes of 50 basis points each in June and July. Bets were bolstered by the release of April US personal consumption expenditure (PCE) data on Friday, suggesting inflationary pressures in the country may be easing. This was seen as a key factor behind the recent drop in US Treasury yields to a multi-week low.
Therefore, it will be prudent to wait for strong follow-on buying before positioning for further upside amid relatively lower trading volume due to the US Memorial Day holiday. Investors may also prefer to wait on the sidelines ahead of this week’s major US macroeconomic releases, scheduled for the start of a new month, including Friday’s Non-Farm Payrolls report.
Meanwhile, broader market risk sentiment could continue to play a key role in driving safe-haven flows and influencing the yen. Traders will continue to reference the dollar’s price dynamics to take advantage of short-term opportunities around the USD/JPY pair.
Technical levels
Source: Fx Street
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