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  • A combination of factors prompted some fresh selling around USD/JPY on Monday.
  • The risk-off mood benefitted the JPY, sliding US bond yields undermined the USD.
  • The fundamental backdrop supports prospects for the emergence of some dip-buying.

The USD/JPY pair added to its intraday losses and continued losing ground through the first half of the European session. The pair was last seen hovering near the lower boundary of its daily trading range, around the 109.35-30 region, down 0.30% for the day.

Having faced rejection near the key 110.00 psychological mark on Friday, the pair met with some fresh supply on the first day of a new trading week and was pressured by a combination of factors. A slight deterioration in the global risk sentiment benefitted the safe-haven Japanese yen and exerted some downward pressure on the USD/JPY pair. News that one of Iran’s nuclear facilities was hit by a terrorist act dented investor’s appetite for perceived riskier assets and provided a modest lift to traditional safe-haven assets.

On the other hand, the US dollar struggled to preserve its intraday gains amid the ongoing decline in the US Treasury bond yields. This was seen as another factor exerting some downward pressure on the USD/JPY pair. The USD found some support in reaction to the Fed Chair Jerome Powell added to the narrative of a relatively faster US economic recovery from the pandemic. During an interview with 60 Minutes, Powell said that the US economy is poised for an extended period of strong growth and hiring, though COVID-19 still poses some risk.

Powell further added that the Fed wants inflation moderately above 2% for some time but does not want it to go materially above 2%. Against the backdrop of Friday’s hotter-than-expected US Producer Price Index, which recorded the largest annual gains in 9-1/2 years in March, Powell’s remarks further fueled speculations about an uptick in US inflation. This, in turn, has been raising doubts that the Fed will be forced to raise interest rates sooner rather than later, which supports prospects for the resumption of the recent USD rally.

The fundamental backdrop suggests that any subsequent fall in the USD/JPY pair might still be seen as an opportunity to initiate fresh bullish positions. There isn’t any major market-moving economic data due for release on Monday, leaving the pair at the mercy of the USD price dynamics, US bond yields and the broader market risk sentiment. This further makes it prudent to wait for some strong follow-through selling before traders start positioning for an extension of the recent corrective slide from the vicinity of the 111.00 mark, or one-year tops touched on March 31.

Technical levels to watch