- USD/JPY attracted some buying on the dips on Tuesday, although the rally was not followed up.
- The widening of the US and Japanese bond yield spread continued to act as a tailwind for the pair.
- The Ukraine crisis extended support for the JPY as a safe haven and capped any significant gains.
The pair USD/JPY extended its sideways consolidation price move and remained confined to a range around the 122.80 region during the early American session.
After an intraday drop to the 122.35 area, the USD/JPY pair attracted some buying on Tuesday, although it struggled to capitalize on the move or break above the 123.00 round level. Widening yields on US and Japanese government bonds turned out to be a key factor that acted as a supportive factor for spot prices. That said, uncertainty over the Ukraine prompted some safe-haven flows into the Japanese yen and kept any significant gains for the pair at bay.
Bank of Japan Governor Haruhiko Kuroda reiterated that the central bank will offer to buy an unlimited amount of 10-year JGBs if long-term interest rates rise quickly. Conversely, expectations that the Fed will tighten monetary policy at a faster pace continued to support the rise in US Treasury yields. This, to a greater extent, helped offset a softer tone than it surrounded the US dollar and continued to provide support to the USD/JPY pair.
However, the silver lining remained limited amid fading hopes for diplomacy in Ukraine. Investors remain concerned about the prospect of more Western sanctions against Russia for its alleged war crimes in Ukraine. This was evident from the prevailing mood of caution in equity markets, which benefited traditional haven assets including the JPY. Investors also seemed reluctant to make aggressive bets ahead of the FOMC Minutes due on Wednesday.
It’s worth remembering that markets expect the Fed to raise interest rates by 100 bps over the next two meetings to combat stubbornly high inflation. Therefore, the Minutes will be scrutinized for further clues on the Federal Reserve’s policy outlook, which will influence short-term USD price dynamics and provide a further directional boost to the USD/JPY pair. Meanwhile, the events surrounding the Russia-Ukraine saga should allow traders to take advantage of some short-term opportunities.
Technical levels
Source: Fx Street
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