- USD/JPY was seen oscillating in a range through the first half of the trading action on Tuesday.
- COVID-19 jitters, subdued USD demand, softer US bond yields collaborated to cap the upside.
- Hawkish Fed expectations should help limit any meaningful slide ahead of the US CPI report.
The USD/JPY pair lacked any firm directional bias and remained confined in a narrow trading band below mid-110.00s heading into the European session.
A combination of factors failed to assist the USD/JPY pair to capitalize on its recent bounce from near three-week lows, around mid-109.00s touched last Thursday and led to a subdued/range-bound price action on Tuesday. Investors remain worried about the economic fallout from the spread of the highly contagious Delta variant of the coronavirus. This, in turn, acted as a tailwind for the safe-haven Japanese yen.
Apart from this, a softer tone around the US Treasury bond yields kept the US dollar bulls on the defensive and further collaborated towards capping the upside for the USD/JPY pair. That said, expectations that the Fed is moving towards tightening its monetary policy stance sooner continued lending some support to the greenback. This was seen as a key factor that helped limit any meaningful slide for the USD/JPY pair.
It is worth recalling that the June FOMC meeting minutes released last Wednesday revealed that Fed officials agreed on the need to be ready to act if inflation or other risks materialize. Hence, the market focus will remain on Tuesday's release of the latest US consumer inflation figures, due later during the early North American session. The data may offer clues about the likely timing of tapering and interest rate hikes.
This will be followed by Fed Chair Jerome Powell's semi-annual congressional testimony on Wednesday and Thursday, which will be closely watched for his response to the inflation figures. Powell's remarks should influence market expectations about the Fed's near-term monetary policy outlook, which will play a key role in driving the USD in the near term and provide a fresh directional impetus to the USD/JPY pair.
Heading into the key data/event risk, investors might refrain from placing any aggressive bets. This further warrants some caution for bearish traders before positioning for any meaningful depreciating move.
Technical levels to watch
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