USD/JPY drops to new session low near 111.60 as 10-year T-bond yield slides below 3%

• USD/JPY comes under a modest pressure ahead of FOMC.
• Wall Street turns negative to reflect a weak appetite for risk.
• US Dollar Index consolidates daily gains below 94.70.

The USD/JPY pair reversed course in the US afternoon and fell to a fresh daily low at 111.63 as the JPY found demand in the risk-off mood. As of writing, the pair was trading at 111.72, losing 0.13% on the day.

The data published by the ADP on Wednesday showed that the private sector employment increased by 219K in July to beat the market expectation of 185K. Although other data revealed that the manufacturing sector in the U.S. lost momentum with the ISM and Markit PMI readings both retreating from their June levels, the US Dollar Index didn’t have a difficult time staying in the positive territory ahead of the FOMC’s interest rate decision and the monetary policy statement.

Despite the upbeat tone surrounding the USD, however, the pair lost its traction as the falling stocks and T-bond yields reflect a stronger demand for safe-havens such as the JPY. After starting the day on a positive note and stretching higher in the first couple of hours of the session, the Dow Jones Industrial Average and the S&P 500 indexes slumped to session lows while the 10-year T-bond yield failed to hold above the critical  3% mark.

Previewing today’s FOMC meeting,  “we still think the Fed is on track to deliver two more hikes this year (September and December), which is in line with the Fed’s own projection (although the committee is divided between one and two hikes) and market pricing. We do not expect any major shifts in the communication on the balance sheet either,” Danske Bank analysts said in a recently published report.

Technical outlook

The pair could face the first technical support at 111.60 (daily low/20-DMA) ahead of 110.85 (50-DMA) and 110 (psychological level).  On the upside, resistances align at 112.15 (daily high), 112.60 (Jul. 20 high) and 113.10 (Jul. 17 high).