USD/JPY remains bearish around 127.60-65 zone, downside seems limited

• USD/JPY fell on the first day of the week amid widespread dollar weakness.
• Risk appetite undermined the yen’s safe haven and helped limit losses.
• The divergence in policy from the Fed and the Bank of Japan also prevented traders from making further bearish bets.

The pair USD/JPY witnessed some selling on the first day of a new week, although it managed to find some support ahead of the monthly low around 127.00 hit last Thursday. The pair was on the defensive during the middle of the European session and was last seen trading a few pips above 127.50.

The US dollar added to last week’s heavy losses and fell to its lowest level since April 26, amid a sharp rebound in demand for the shared currency. Furthermore, the Federal Reserve’s interest rate hike of 50 basis points in the next two monetary policy meetings is fully discounted in the markets. The combination of factors dragged the dollar index to its lowest level since April 26, which, in turn, put some downward pressure on the USD/JPY pair. However, a combination of factors acted as a headwind for the Japanese yen and helped limit any deeper losses, at least for now.

Investors were bullish on the hope that the easing of COVID-19 restrictions in China would boost the global economy. This was evidenced by a generally positive tone around equity markets, which tends to undermine the haven of the Japanese yen. The flow of risk appetite was bolstered by a nice rally in US Treasury yields. This, coupled with a wide divergence in the monetary policy stance adopted by the Bank of Japan and the Fed, acted as a tailwind for the pair. This, in turn, warrants caution before placing further bearish bets on the USD/JPY pair.

It is worth remembering that the Bank of Japan has promised to maintain its current ultra-loose policy setting and has promised unlimited bond-buying operations to defend its near-zero 10-year yield target. On the contrary, the US central bank is expected to take more drastic measures to control inflation. Therefore, the focus will be on the Minutes of the last FOMC monetary policy meeting, which will be published on Wednesday. This, coupled with US macro data scheduled for the latter part of the week, should provide a further directional boost to the USD/JPY pair.

Meanwhile, the dynamics of the dollar price could continue to influence the pair amid the absence of market-relevant economic releases in the United States. Traders could continue to reference the broader market risk sentiment and US bond yields to take advantage of short-term opportunities around the USD/JPY pair.

Technical levels