• A combination of factors dragged USD/JPY lower for the second successive day on Wednesday.
  • The downside seems cushioned amid the divergence in policy outlooks between the Fed and BoJ.
  • Investors now eye the US ADP report and final Q4 GDP print for some short-term trading impetus.

The USD/JPY pair managed to recover nearly 60 pips from the multi-day low and was last seen trading just below the 122.00 mark, still down nearly 1% for the day.

The pair witnessed heavy selling for the second successive day on Wednesday and retreated further from its highest level since August 2015, around the 125.10 region touched on the first day of the week. Speculation that officials were uncomfortable and would respond to the Japanese yen’s recent weakness turned out to be a key factor that dragged the USD/JPY pair lower.

Apart from this, a turnaround in the risk sentiment drove some haven flows towards the JPY and exerted additional downward pressure on the USD/JPY pair. The latest optimism over a diplomatic solution to end the Russia-Ukraine conflict faded rather quickly, which was evident from a fresh leg down in the equity markets. This, in turn, benefitted traditional safe-haven assets.

On the other hand, the US dollar added to the previous day’s losses and dropped to over a one-week low. This further contributed to the USD/JPY pair’s intraday slide to a multi-day low, around the 121.30 region. That said, an uptick in the US Treasury bond yields, bolstered by hawkish Fed expectations, helped limit any further losses for the major, at least for now.

The markets seem convinced that the Fed would adopt a more aggressive policy stance to combat high inflation and have been pricing in a 50 bps rate hike at the next two meetings. Conversely, the Bank of Japan is expected to stick to its ultra-loose policy for a prolonged period. This, in turn, supports prospects for the emergence of some dip-buying around the USD/JPY pair.

Hence, the downfall might still be categorized as a corrective pullback, warranting some caution before confirming that the USD/JPY pair has topped out. Market participants now look forward to the US economic docket, featuring the release of the ADP report on private-sector employment and the final Q4 GDP print later during the early North American session.

This, along with the US bond yields, might influence the USD price dynamics and provide some impetus to the USD/JPY pair. Apart from this, traders will take cues from fresh developments surrounding the Russia-Ukraine saga. The incoming geopolitical headlines would drive the broader market risk sentiment and demand for the safe-haven JPY.

Technical levels to watch

This article was originally published by Fxstreet.com.Read the original article here.

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