USD/JPY erases early gains, turns flat near 108.70

• 10-year US Treasury bond yield erases more than 1% on the day.
• US Dollar Index clings to gains above the 98 mark.
• Investors likely to remain on sidelines ahead of Fed meeting.

The USD/JPY pair started the week under modest selling pressure and erased a small portion of last week’s gains as a technical correction before finding support near 108.40. As of writing, the pair was virtually unchanged on the day at 108.66.

Following Friday’s sharp increase on the back of upbeat GDP data from the US, the pair closed the week with a gain of nearly 50 pips. The US Bureau of Economic Analysis reported that the real economy expanded by 2.1% on a yearly basis in the second quarter to come in better than the market expectation of 1.8%.

Fed is seen cutting policy rate by 25 bps

Although the odds of a 25 basis point Fed rate cut, as shown by the CME FedWatch Tool  remained unchanged near 80% following the strong data, the US Dollar Index advanced to its highest level in nearly two months to keep the pair’s bearish momentum intact.

Previewing this week’s Fed meeting, “The Federal Open Market Committee (FOMC) is expected to ease rates this week. We expect the central bank to cut its target rates by 25bps. We also expect an end to quantitative tightening,” the ANZ analysts said. “Ongoing elevated uncertainty and weak domestic inflation mean that the FOMC will keep its easing bias.”

Despite the broad USD strength, however, a more-than-1% drop witnessed in the 10-year US Treasury bond yield on Monday seems to be capping the pair’s gains for the time being.

Technical levels to watch for