USD/JPY: risk-off back in play as yen picks up bid back towards 108.50

• USD/JPY climbed higher overnight on the back of a pop in Europeana and US equities.
• USD/JPY rallied back from the political woes fuelled drop to 108.10.

USD/JPY rallied back from the political woes fuelled drop to 108.10  and was testing the proximity of the H&S neckline, albeit capped by the 21-4hr SMA at 109.02.109.07 was the NY high and the pair is currently oscillating at 108.59 at the time of writing.  

Funda-FX wrap: threat of snap elections in Italy ease, but more volatility to come

USD/JPY is offered in Tokyo with the Nikkei dropping as well at the start of play, unable to keep up with Wall Streets turn-around performance despite a slightly healthier political environment in the eurozone.  

Markets cheered when Di Maio, the Five Star Movement leader said in European trade: “at the moment we do not contemplate an interim government because without the trust of the parliament, in the past, interim governments brought lots of troubles to Italians. Either we re-vote now or we try to form a government again as everything is in place for it”, adding that Paolo Savona must stay in the government but it is not quite clear yet if he will indeed take the finance minister role.  

The major European bourses made a partial comeback compared to yesterday’s downturn as follows:

• Spain’s IBEX rose 0.7%
• Italy’s FTSE MIB rose 2.09%
• Portugal’s PSI20 rose 1.38%
• German Dax rose 0.6%
• France’s CAC rose 0.5%
• UK FTSE rose 0.5%

As for Italy’s 2yr government bond yield, these fell 123bp to 1.60%, partly retracing the previous day’s 193bp rise as money flowed back and the 10yr Italian bond yield also fell, but by a marginal 29bp. Risk was on and the yen lost a bid when German bunds also lost some safe-haven demand. The 10yr yield rose by 11bp. Across the pond, the US 10yr treasury yield climbed from 2.80% in the Sydney afternoon to 2.85% by late NY trade while the Fed fund futures increased expectations of Fed hikes, to two hikes by year-end with the Fed’s Beige Book underpinning sentiment for a June hike.  

USD/JPY levels

From a technical perspective, the H&S has so far not been the catalyst for an outright sell-off despite the breach of the 108.80 level and subsequent drop to the lows of 108.10.

However, Valeria Bednarik, chief analyst at FXStreet explained that the ongoing advance seems to be losing steam according to technical readings in the 4 hours chart: “The pair remains below its 100 and 200 SMA, while technical indicators lost upward momentum in negative territory, after correcting oversold readings. The 38.2% retracement of the mentioned decline stands at 109.35, with gains beyond it painting a more encouraging bullish picture.”