- USD/JPY attracted buying on Friday and recovered further from the monthly low hit on Thursday.
- Risk appetite undermined the safe haven yen and extended support amid modest dollar strength.
- Recession fears prevented the bulls from making aggressive bets and limited significant gains.
The pair USD/JPY maintained its modest intraday gains and was seen trading near the daily high, just above 128.00 at the start of the American session.
A combination of supportive factors helped the USD/JPY pair attract some buying near the 127.50 area on Friday and take advantage of the overnight bounce from 127.00, or the monthly low. The People’s Bank of China (PBOC) cut the prime rate on five-year loans by 15 basis points to counter the slowing economy and boosted investor confidence. This translated into a strong recovery in equity markets and undermined the safe haven of the Japanese yen. This, coupled with a nice pickup in US dollar demand, acted as a tailwind for most.
Against the backdrop of expectations of more aggressive policy tightening by the Federal Reserve, the flow of risk appetite led to a modest recovery in US Treasury yields and extended support for the dollar. Apart from this, a large divergence in the monetary policy stance adopted by the US central bank and the Bank of Japan offered additional support to the USD/JPY pair. It is worth mentioning that the Bank of Japan has promised to maintain its current ultra-loose policy setting and vowed to carry out unlimited bond-buying operations to defend its near-zero target for 10-year yields.
The backdrop appears to be tilting in favor of bullish traders, although the gloomy global economic outlook prevented the USD/JPY pair from rising significantly, at least for now. Investors remain concerned that a more aggressive move by major central banks to rein in inflation will pose challenges to the global economy. Additionally, prolonged COVID-19 lockdowns in China and the war between Russia and Ukraine have fueled recession fears. This makes it prudent to wait for strong follow-on buying before confirming that the recent corrective decline has run its course.
In the absence of any major economic releases in the US, US bond yields will continue to influence dollar price dynamics. Aside from this, traders will follow the broader market risk sentiment signals to take advantage of short-term opportunities around the USD/JPY pair.
Technical levels
Source: Fx Street
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