USD/JPY SLIDES FURTHER BELOW 135.00 MARK, BACK CLOSER TO WEEKLY LOW AMID RECESSION FEARS

• USD/JPY lost ground for the second straight day and retreated further from a 24-year peak.
• Sliding US bond yields, recession fears benefitted the safe-haven JPY and exerted pressure.
• The Fed-BoJ policy divergence warrants some caution for bears amid modest USD strength.

The USD/JPY pair witnessed heavy selling for the second successive day on Friday and retreated further from its highest level since September 1998, around the 137.00 mark set on Wednesday. The corrective fall dragged spot prices further below the 135.00 psychological mark, closer to the weekly low during the early European session.

The prevalent risk-off environment – as depicted by a sea of red across the equity markets – drove haven flows towards the Japanese yen and exerted downward pressure on the USD/JPY pair. The market sentiment remains fragile amid concerns that a more aggressive move by major central banks to curb soaring inflation would pose challenges to global economic growth. Apart from this, a further escalation in tensions between the West and Russia – in response to the latter’s invasion of Ukraine – has stoked fears of a possible recession.

The worsening global economic outlook forced investors to take refuge in traditional safe-haven assets, which was reinforced by the recent slump in the US Treasury bond yields. This resulted in the narrowing of the US-Japan yield differential, which further benefitted the JPY and prompted traders to lighten their bullish bets around the USD/JPY pair. That said, the divergent monetary policy stance adopted by the Federal Reserve and the Bank of Japan held back traders from placing aggressive bearish bets amid modest US dollar strength.

Speaking at the ECB Forum in Sintra on Wednesday, Fed Chair Jerome Powell said that the US central bank remains focused on getting inflation under control. Powell further added that the market pricing is pretty close to the dot plot and that the US economy is well-positioned to handle tighter policy. This, in turn, reaffirmed bets that the Fed would retain its faster policy tightening path and underpinned the USD. In contrast, the BoJ has repeatedly signalled that it would stick to its ultra-accommodative policy and keep borrowing costs at “present or lower” levels.

The mixed fundamental backdrop warrants some caution before confirming that the USD/JPY pair has topped out in the near term and positioning for a deeper correction in spot prices. Market participants now look forward to the release of the US ISM Manufacturing PMI, due later during the North American session. Apart from this, the US bond yields, the USD price dynamics and the broader market risk sentiment might provide a fresh impetus, which should allow traders to grab short-term opportunities around the major.