USD/JPY returns below 130.00 in a risk-off environment, falls seem limited

• USD/JPY falls into negative territory for the second day in a row amid revival in safe-haven demand.
• The looming risk of recession weighs on investor sentiment and drives some safe-haven flows into the yen.
• A modest rebound in demand for dollars could provide support and help limit the decline in major currencies.

The pair USD/JPY It attracts some sellers near the 130.60 area and turns lower for the second day in a row on Wednesday. The pair maintains its offered tone heading into the North American session and is currently near the daily low, around the 129.75-129.70 area.

A combination of factors is providing a slight boost to the Japanese Yen which, in turn, is putting some downward pressure on the USD/JPY pair. Despite last week’s dovish decision by the Bank of Japan, Market Participants seem convinced that high inflation may invite a tougher central bank stance later this year. On the other hand, a new wave of global risk aversion benefits the yen as a safe haven.

Market sentiment remains fragile in the face of looming recessionary risks, fueled by concerns about economic headwinds stemming from the worst COVID-19 outbreak in China and the protracted war between Russia and Ukraine. On the other hand, the latest World Bank report reported that the world economy is now in its sharpest post-recession slowdown since the 1970s. This, in turn, is weighing on investor sentiment and boosting some safe haven flows into the yen.

The global flight to safety, meanwhile, helps the US dollar gain some positive traction and move away from nine-month lows. This could provide some support for the USD/JPY pair and help limit any deeper losses. Traders may also refrain from making aggressive bets ahead of this week’s major US macroeconomic releases, which could influence the Fed’s rate hike cycle. This will boost demand for dollars and provide further directional momentum. to the main currencies.

Meanwhile, broader market risk sentiment, along with USD price dynamics, will be factored into taking advantage of near-term opportunities around the USD/JPY pair in the absence of any relevant US macro data. However, recent price developments and the fundamental background suggest that the recent downtrend may still be far from over. Therefore, any recovery attempts could be sold off and remain capped, for the time being.

Technical levels to watch