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USD/JPY Analysis: Bulls retain control above 116.00 on Russia-Ukraine talks, ahead of US CPI

  • USD/JPY gained traction for the fourth straight day and climbed back above the 116.00 mark.
  • The risk-on mood undermined the safe-haven JPY and remained supportive of the move up.
  • The overnight spike in the US bond yields acted as a tailwind for the USD and inspired bulls.
  • The focus shifts to the US CPI report amid optimism over the Russia-Ukraine ceasefire talks.

The USD/JPY pair prolonged its bullish trajectory witnessed since the beginning of the current week and scaled higher for the fourth successive day on Thursday. The momentum pushed spot prices further beyond the 116.00 mark and was sponsored by the risk-on impulse in the markets, which tends to undermine the safe-haven Japanese yen. The risk sentiment made a solid comeback in reaction to the news that Russian Foreign Minister Sergey Lavrov and his Ukrainian counterpart Dmytro Kuleba have agreed to meet on Thursday. This would be the first potential talk between the two officials since Russia's invasion of Ukraine on February 24 and raised for a diplomatic solution to end the war.

Bulls further took cues from the overnight spike in the US Treasury bond yields, which assisted the US dollar to stall this week's pullback from the highest level since May 2020. This was seen as another factor that acted as a tailwind for the pair and might have already set the stage for additional gains. That said, a combination of factors could cap the optimistic move in the markets. Investors remain concerned about a further escalation in tensions between Russian and Western powers. This, along with worries of a major inflationary shock amid the rapidly deteriorating global economic outlook, warrants some caution for aggressive bullish traders and positioning for any further gains.

In fact, US President Joe Biden on Tuesday imposed an immediate ban on Russian oil and other energy imports. Britain matched the move and said that it would phase out the import of Russian oil by the end of 2022. The European Union (EU) also announced new sanctions against Russian individuals and Belarus banks. The Russian foreign ministry said that the response to the Western sanctions will be sensitive and precise. Moreover, the recent monster gains in commodity prices have been fueling worries of a major inflationary shock amid the rapidly deteriorating global economic outlook. Hence, investors will keep a close eye on Thursday's release of the US consumer inflation figures.

The US CPI report, due later during the early North American session, along with the US bond yields, will influence the USD price dynamics. Apart from this, traders will take cues from the broader market risk sentiment and fresh developments surrounding the Russia-Ukraine saga. This, in turn, should provide some impetus to the pair and allow traders to grab some meaningful trading opportunities.

Technical outlook

From a technical perspective, the overnight break through the 115.75-115.80 horizontal resistance and a subsequent strength beyond the 116.00 mark could be seen as a fresh trigger for bullish traders. Some follow-through buying beyond the YTD high, around the 116.35 region, will reaffirm the constructive outlook and pave the way for an extension of the ongoing positive momentum. The pair could then aim to reclaim the 117.00 mark for the first time since January 2017.

On the flip side, the 115.80-115.75 resistance breakpoint now seems to protect the immediate downside ahead of mid-115.00s. Any further decline is more likely to attract fresh buying near the 115.15-10 area. This is closely followed by the key 115.00 psychological mark, which if broken decisively could shift the near-term bias in favour of bearish traders. The next relevant support is pegged near February swing low, around the 114.40 region.

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Haresh Menghani

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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