- USD/JPY continued losing ground for the third straight day and dropped to a fresh weekly low.
- The risk-off mood benefitted the safe-haven JPY and exerted pressure amid sliding bond yields.
- Hawkish Fed expectations acted as a tailwind for the USD and helped limit any further losses.
The USD/JPY pair maintained its offered tone through the early European session, albeit has managed to recover a few pips from the weekly low. The pair was last seen trading just below the 114.00 mark, still down around 0.20% for the day.
The pair extended this week's rejection slide from the key 115.00 psychological mark and witnessed some follow-through selling for the third successive day on Friday. The downward trajectory dragged the USD/JPY pair back closer to the monthly swing low and was sponsored by a combination of factors.
Concerns that rising borrowing costs could dent the earnings outlook for companies tempered investors' appetite for perceived riskier assets. This was evident from a weaker tone around the equity markets, which forced investors to take refuge in safe-haven currencies, including the Japanese yen.
Bearish traders further took cues from the ongoing retracement slide in the US Treasury bond yields from multi-year highs, which undermined the US dollar. That said, the prospects for a faster policy tightening by the Fed acted as a tailwind for the buck and helped limit losses for the USD/JPY pair.
Investors seem convinced that the Fed would begin raising interest rates in March to combat stubbornly high inflation and have been pricing in the possibility for a total of four hikes in 2022. Hence, the market focus will remain glued to the upcoming FOMC monetary policy meeting on January 25-26.
The outcome will be looked upon for fresh clues and clearer signals about the likely timing when the Fed will commence its rate hike cycle. This, in turn, will play a key role in influencing the near-term USD price dynamics and help determine the next leg of a directional move for the USD/JPY pair.
In the meantime, the US bond yields will drive the USD demand. Apart from this, traders will take cues from the broader market risk sentiment for some short-term opportunities around the USD/JPY pair amid absent relevant market moving economic releases from the US.
Technical levels to watch
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