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  • USD/JPY reversed the early European session dip to the vicinity of mid-108.00s.
  • The risk-on mood undermined the safe-haven JPY and extended some support.
  • Retreating US bond yields, weaker USD, overbought conditions might cap gains.

The USD/JPY pair quickly recovered around 30 pips from the early European session lows and was last seen trading in the neutral territory, around the 108.85 region.

The pair witnessed some intraday selling and retreated around 65-70 pips from the 109.20-25 region, or the highest level since June 2020 amid a broad-based US dollar weakness. A sharp pullback in the US Treasury bond yields prompted the USD bulls to take some profits off the table, which, in turn, exerted some pressure on the USD/JPY pair.

However, a combination of factors helped limit any further losses, rather assisted the USD/JPY pair to attract some dip-buying just ahead of mid-108.00s. The safe-haven Japanese yen continues to be weighed down by the underlying bullish sentiment in the financial markets amid growing optimism over a strong global economic recovery from the pandemic.

The JPY was further undermined by Tuesday’s disappointing domestic data, which showed that the economy expanded at a slower pace than initially reported during the fourth quarter of 2020. Adding to this, Household spending slumped 6.1% in January and suggested that the economy might have again hit a roadblock in the January-March quarter.

That said, extremely overstretched conditions on the daily chart warrants caution before positioning for any further appreciating move. There isn’t any major market-moving economic data due for release from the US. This might further hold traders from placing fresh bullish positions and lead to some consolidative price action around the USD/JPY pair.

Technical levels to watch