USD/JPY remains depressed below 122.00, downside seems cushioned amid Fed-BoJ divergence
|- USD/JPY witnessed an intraday pullback from the multi-year peal touched earlier on Friday.
- Extremely overbought conditions prompted some profit-taking amid modest USD weakness.
- The Fed-BoJ monetary policy divergence supports prospects for the emergence of dip-buying.
The USD/JPY pair maintained its offered tone heading into the North American session and was last seen trading around the 121.70-121.75 region, down nearly 0.50% for the day.
The Bank of Japan provided a bullish signal on Friday and refrained from stepping into the markets to arrest the continuous rise in yields. In fact, the yield on the 10-year Japanese government bond (JGB) rose above the level at which the BoJ offered to buy an unlimited amount in February. This, in turn, provided a goodish lift to the Japanese yen. Apart from this, modest US dollar weakness prompted some profit-taking around the USD/JPY pair.
Spot prices witnessed a dramatic intraday turnaround and plunged over 125 pips from the vicinity of mid-122.00s, or the highest level since December 2015 touched earlier this Friday. That said, a combination of factors assisted the USD/JPY pair to find decent support near the 121.20-121.15 region. and stall the intraday corrective pullback. The Fed-BoJ policy divergence, along with a positive risk tone acted as a headwind for the JPY.
It is worth recalling that a slew of influential FOMC members, including Fed Chair Jerome Powell, left the door open for a larger rise in borrowing costs to bring down unacceptably high inflation. The markets were quick to price in the possibility of a 50 bps Fed rate hike move at the May policy meeting. This was reinforced by the fact that the yield on the benchmark 10-year US government bond stood tall near the highest level since 2019.
Elevated US Treasury bond yields attracted some USD dip-buying and further contributed to limiting the downside for the USD/JPY pair, at least for the time being. The fundamental backdrop favours bullish traders, suggesting that Friday's downfall could be categorized as a corrective pullback amid extremely overbought conditions. Hence, any subsequent slide might still be seen as a buying opportunity and is more likely to remain limited.
Technical levels to watch
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.