USD/JPY retreats from multi-day tops, holds above mid-111.00s
- The risk-off impulse failed to assist USD/JPY to capitalize on its early move up to multi-day tops.
- Surging US bond yields, sustained USD buying should help limit any meaningful slide for the pair.
- Investors now look forward to the US ADP report for some impetus ahead of Friday’s NFP report.
The USD/JPY pair surrendered a major part of its intraday gains to four-day tops and was last seen trading just a few pips above mid-111.00s.
Worries that the continuous surge in crude oil/energy prices will stoke inflation and derail the global economic recovery weighed on investors' sentiment. Adding to this, fragile US-China trade ties, China Evergrande’s debt crisis and a stalemate over the US debt ceiling triggered a fresh wave of the global risk-aversion trade. This, in turn, extended some support to the safe-haven Japanese yen and failed to assist the USD/JPY pair to capitalize on its early positive move.
That said, a combination of factors acted as a tailwind for the major and helped limit any meaningful decline, at least for the time being. The US dollar added to the overnight gains and inched back closer to one-year tops amid firming expectations that the Fed would begin tapering its bond purchases by the end of 2021. Moreover, the widening of the US-Japanese government bond yield differential could cap gains for the Japanese yen and also lend some support to the USD/JPY pair.
The markets also seem to have started pricing in the prospects for a Fed rate hike move in 2022 amid fears of a faster than expected rise in inflation. This, in turn, pushed the yield on the benchmark 10-year US government bond yield to the highest level since June, around 1.573% during the early part of the trading action on Wednesday. Conversely, the yield on the 10-year Japanese government bond remained near zero due to the Bank of Japan's yield curve control policy.
The fundamental backdrop seems tilted firmly in favour of bullish traders and supports prospects for additional gains. However, investors might prefer to wait on the sidelines ahead of Friday's release of the closely-watched US monthly jobs report (NFP) before placing directional bets. In the meantime, traders would take cues from Wednesday's release of the US ADP report. Apart from this, the US bond yields and the broader market risk sentiment might provide some impetus to the USD/JPY pair.
Technical levels to watch