USD/JPY drops back towards 108.00 ahead of BOJ

USD/JPY steps back from a three-day high, published earlier in Asia, to 108.14 as markets in Tokyo open for Tuesday’s trading. In doing so, the yen pair struggles to keep Monday’s upbeat performance ahead of the key Bank of Japan (BOJ) monetary policy meeting.

Other than the pre-BOJ caution, the market’s confusion amid the vaccine optimism and covid woes, not to forget mixed geopolitical news and stimulus updates, keep USD/JPY traders troubled.

Among the risk catalysts, recent fears that the US Republicans may regain control in the Senate, which in turn raise challenges for further stimulus, was the major downer for Wall Street. However, unlock plans from the UK and the US as well as hopes that faster vaccinations will trigger a sooner economic recovery battle the bears. Additionally, doubts over India’s ability to overcome the pandemic, despite global rescue, also test the USD/JPY traders.

Amid these plays, S&P 500 Futures and Nikkei 225 both struggle for a clear direction while the US dollar index (DXY) remains pressured around the two-month low by the press time.

Looking forward, the BOJ’s tone in a statement and the economic outlook for the first quarter (Q1) will be closely watched after the nation recalled emergency in Tokyo and three other prefectures due to the covid resurgence. It should be noted that the BOJ is up for keeping its short-term rates with a target of -0.1% while also targeting 0.0% figures for the 10-year bond yield.

Ahead of the event, Bloomberg said, “The recent virus resurgence clouds the near-term economic outlook, especially given Japan’s slow vaccine rollout. Still, the BOJ will likely hold the view that the economy will recover at a modest pace, followed by a gradual pickup in inflation.”

Technical analysis

Corrective pullback needs to cross late March lows near 108.40 to recall USD/JPY buyers. Otherwise, the odds of the pair’s drop to a monthly low near 107.50 can’t be ruled out.