USD/JPY trades with modest losses, below 116.00 mark amid softer risk tone

The USD/JPY pair remained on the defensive through the early European session and was last seen hovering near the daily low, just below the 116.00 round-figure mark.

The pair struggled to capitalize on the previous day's hawkish FOMC minutes-inspired late rebound from the 115.60 region and came under some renewed selling pressure on Thursday. The risk-off impulse – as depicted by a generally weaker tone around the equity markets – benefitted the safe-haven Japanese yen and exerted some pressure on the USD/JPY pair. The downside, however, remains cushioned amid a goodish pickup in the US dollar demand.

The December 14-15 FOMC monetary policy meeting minutes indicated that the US central bank could hike interest rates sooner-than-expected to combat high inflation. In fact, the money markets are pricing in an 80% chance of an eventual liftoff in March, when the Fed is expected to end its monthly asset purchases. This, in turn, pushed the US Treasury bond yields higher, which underpinned the buck and extended some support to the USD/JPY pair.

In fact, the US 2-year notes, which are highly sensitive to rate hike expectations along with 5-year notes, soared to a near two-year high. Moreover, the yield on the benchmark 10-year US government bond shot to the highest level since October. Conversely, the 10-year JGB yield remained near zero due to the Bank of Japan's yield curve control policy. The widening of the US-Japanese yield differential further helped limit the downside for the USD/JPY pair.

The fundamental backdrops favour bullish traders and support prospects for the emergence of some dip-buying at lower levels. Hence, it will be prudent to wait for a strong follow-through selling before confirming that the USD/JPY pair's recent bullish run to a five-year high has lost steam and positioning for any meaningful corrective slide.

Market participants now look forward to the US economic docket, highlighting the releases of the usual Weekly Initial Jobless Claims and ISM Services PMI later during the early North American session. This, along with the US bond yields, should influence the USD price dynamics and provide a fresh impetus to the USD/JPY pair. Traders will further take cues from the broader market risk sentiment to grab some short-term opportunities.

Technical levels to watch