USD/JPY Analysis: Bulls managed to defend a near two-week-old ascending trend-line support

• USD/JPY witnessed an intraday turnaround from a fresh two-decade high touched on Monday.
• The risk-off mood benefitted the safe-haven JPY and exerted pressure amid modest USD slide.
• The Fed-BoJ policy divergence helped limit the fall, rather attract some dip-buying on Tuesday.

The USD/JPY pair struggled to capitalize on its early positive move and retreated over 100 pips from its highest level since April 2002 touched earlier on Monday. The prospects for rapid interest rate hikes in the US and strict COVID-19 lockdowns in China have been fueling concerns about softening global growth. This, in turn, weighed on investors' sentiment and extended some support to the safe-haven Japanese yen. The anti-risk flow was reinforced by a modest pullback in the US Treasury bond yields, which prompted some US dollar profit-taking from a two-decade high and exerted downward pressure on the major.

The corrective slide extended through the early part of the Asian session, though a big divergence in the monetary policy stance adopted by the Bank of Janap and the Fed helped limit further losses. The Japanese central bank has vowed to keep its existing ultra-loose policy settings and promised to conduct unlimited bond purchase operations to defend its “near-zero” target for 10-year yields. On the other hand, the Fed is widely expected to tighten its monetary policy at a faster pace to combat stubbornly high inflation. In fact, the markets are still pricing in a further 200 bps Fed rate hike move for the rest of 2022.

This, along with signs of stability in the equity markets, assisted the USD/JPY pair to attract some dip-buying near the 129.80 region. That said, the upside potential seems limited as investors might prefer to wait on the sidelines ahead of the release of the latest US consumer inflation figures on Wednesday. The data will play a key role in influencing the Fed's near-term policy outlook, which, in turn, would drive the USD and provide a fresh directional impetus to the USD/JPY pair. In the meantime, traders will take cues from the US bond yields and the broader market risk sentiment amid absent relevant economic data from the US.

Technical outlook

From a technical perspective, the overnight pullback constitutes the formation of a bearish double-top pattern on short-term charts. Bulls, however, managed to defend support marked by a near two-week-old ascending trend-line. The said support, currently around the 129.80-129.75 region, should now act as a pivotal point for intraday traders, which if broken would add credence to the bearish pattern and set the stage for deeper losses. The pair could then accelerate the fall towards testing the 100-period SMA on the four-hour chart, around the 129.00 round figure. The downward trajectory could further get extended towards the 128.25-128.20 region en-route the 128.00 mark and the 127.70-127.65 support, below which the pair could slide to the 127.00 level.

On the flip side, the 130.70-130.75 region now seems to act as an immediate resistance ahead of the 131.00 mark. Some follow-through buying should allow spot prices to retest over a two-decade high, around the 131.35 region touched on Monday. Sustained strength beyond would be seen as a fresh trigger for bullish traders and pave the way for a move towards reclaiming the 133.00 round-figure mark. Spot prices could eventually climb to the next relevant hurdle near the 133.30-133.35 zone.