• A combination of factors dragged USD/JPY to over a one-month low on Tuesday.
  • Recession fears boosted the safe-haven JPY and exerted pressure amid a weaker USD.
  • The Fed-BoJ policy divergence helped limit further losses ahead of the FOMC minutes.

The USD/JPY pair came under some renewed selling pressure on Tuesday and dropped to over a one-month low on Tuesday. The worsening global economic outlook continued driving haven flows toward the Japanese yen and inspired bearish traders amid a weaker US dollar. The markets remain worried that a more aggressive move by major central banks to constrain inflation could pose challenges to global economic growth. Adding to this, the Russia-Ukraine war and the latest COVID-19 outbreak in China have been fueling recession fears. This, in turn, took its toll on the risk sentiment and forced investors to take refuge in traditional safe-haven assets.

The anti-risk flow, along with the idea that the Fed could pause the rate hike cycle later this year, triggered a fresh leg down in the US Treasury bond yields. Given that at least a 50 bps Fed rate hike at the next two meetings is fully priced in, sliding US bond yields weighed heavily on the greenback. Apart from this, strong pickup in the shared currency - bolstered by hawkish comments by the ECB policymakers - exerted additional downward pressure on the buck. Meanwhile, weaker US macro data - flash PMIs, New Home Sales and Richmond Manufacturing Index - failed to provide any respite to bulls, though the BoJ-Fed policy divergence helped limit losses for the pair.

It is worth recalling that the BoJ 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. In contrast, the US central bank is anticipated to take more drastic action to bring inflation under control. Hence, the focus will remain on the minutes of the latest FOMC monetary policy meeting, due for release later Wednesday. Heading into the key event risk, traders will take cues from the release of the US Durable Goods Orders. This, along with the US bond yields and the broader market risk sentiment, could produce short-term trading opportunities around the USD/JPY pair.

Technical outlook

From a technical perspective, the overnight slide stalled near the 126.35 region, or the 50% Fibonacci retracement level of the 121.28-131.35 rally. This should now act as a pivotal point, which if broken decisively will set the stage for an extension of the recent pullback from a two-decade high. Some follow-through selling below the 126.00 mark will reaffirm the negative bias and make the USD/JPY pair vulnerable to testing the 125.00 psychological mark.

On the flip side, the 38.2% Fibo. level, around the 127.45 region, now seems to act as an immediate hurdle ahead of the weekly high, around the 128.05-128.10 area. Sustained strength beyond will suggest that the corrective decline has run its course and shift the bias back in favour of bullish traders. The USD/JPY pair might then climb to the 129.00 neighbourhood, or the 23.6% Fibo. level, before eventually darting to the 130.00 psychological mark with some intermediate resistance near the 129.60-129.70 region.

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