USD / JPY retreats from multi-month highs, decline appears limited

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  • USD / JPY retreats slightly from the multi-month highs hit early Wednesday.
  • The pullback in US bond yields is weighing on the USD and putting some pressure on it.
  • Risk appetite should weigh on the safe-haven JPY and limit deeper losses.

The pair USD/JPY it now appears to have entered a bullish consolidation phase and remains hovering within a range around the 111.50-30 region, just below 18-month highs previously touched on Wednesday.

A combination of divergent factors has not helped the pair capitalize on the strong one-week bullish momentum and has led to subdued price action during the first half of trading action on Wednesday. A modest decline in US Treasury yields it has kept the US dollar bulls on the defensive and acted as a headwind for the USD / JPY pair. Nevertheless, a positive shift in global risk sentiment has weighed on the Japanese safe-haven yen and it has helped limit any significant drops.

Apart from this, the recent Widening the nominal yield spread between US and Japanese government bonds it should limit the JPY. US Treasury yields have been rebounding since late last week amid prospects for an early tightening of monetary policies by the Fed. It is worth remembering that The Fed hinted that it will begin reversing its massive pandemic-era stimulus as soon as November. Additionally, the dot chart indicated the inclination of policymakers to raise rates in 2022.

In contrast, Japanese 10-year government bond yields remained close to zero due to the Bank of Japan’s yield curve control policy. Fundamental backdrop favors pair bulls and supports the prospects for additional earnings. Therefore, price movement limited in a range could still be classified as a consolidation phase, especially after the recent increase of more than 250 pips from the 109.10 region. This, in turn, suggests that any corrective pullback could be viewed as a buying opportunity and remain limited.

Market participants now await the release of pending US home sales data, however the key focus will be on the Fed chairman’s remarks. Jerome Powell at the ECB Forum on Central Banking later during the American session. This, coupled with US bond yields, could influence price dynamics around the dollar and provide some boost to the USD / JPY pair. Investors could continue to take cues from the broader market risk sentiment for some short-term opportunities.

USD / JPY technical levels

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