- USD/JPY failed to capitalize on its modest intraday positive move to the 109.70 region.
- A modest USD weakness was seen as a key factor that acted as a headwind for the pair.
- Rising US bond yields, hawkish Fed expectations, risk-on mood should help limit losses.
The USD/JPY pair struggled to preserve its modest intraday gains and dropped to the lower end of the daily trading range, around the 109.40-35 region during the mid-European session.
The global equity markets made a solid comeback following the previous day's selloff and undermined demand for the safe-haven Japanese yen. This, in turn, assisted the USD/JPY pair to gain some positive traction during the early part of the trading action on Tuesday. However, a combination of factors capped any further gains for the major, rather prompted some fresh selling near the 109.70 region.
Investors remain concerned about contagion from China Evergrande's debt crisis. This, along with uncertainty over the passage of US President Joe Biden’s economic agenda and lingering COVID-19 issues, kept a lid on the optimism. Adding to this, a modest US dollar weakness further exerted some pressure on the USD/JPY pair, though the downside seems cushioned, at least for the time being.
Investors seem convinced that the Fed would begin rolling back its massive pandemic-era stimulus sooner rather than later. Apart from this, the risk-on impulse in the markets triggered a fresh leg up in the US Treasury bond yields. This, in turn, should act as a tailwind for the greenback and help limit any deeper losses ahead of the critical two-day FOMC meeting starting this Tuesday.
The Fed is scheduled to announce its decision during the US session on Wednesday and is anticipated to leave its monetary policy settings unchanged. Hence, the market focus would be on clues about the likely timing of the Fed's tapering plan. This will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the USD/JPY pair.
Meanwhile, Tuesday's US economic docket – featuring the second-tier releases of Building Permits and Housing Starts – might do little to produce any trading opportunities. This further makes it prudent to wait for a strong follow-through selling before positioning for any meaningful slide ahead of the key central bank event risk.
Technical levels to watch
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