USD/JPY sticks to modest recovery gains around mid-107.00s, lacks follow-through

• USD/JPY stages a modest rebound from five-month lows set on Wednesday.
• Receding safe-haven demand weighed on the JPY and remained supportive.
• The ongoing slump in the US bond yields seemed to cap any further gains.

The USD/JPY pair held on to its modest recovery gains and is currently placed near the top end of its daily trading range, around the 107.50-60 region, albeit lacked any strong follow-through.

The pair showed some resilience below the 107.00 level for the second straight session on Tuesday and quickly reversed an early dip to fresh five-month lows. The uptick was being supported by a positive mood around equity markets, which undermined the Japanese yen’s safe-haven demand.

Record-low bond yields capping gains

This coupled with a goodish US dollar rebound from near two-month lows provided an additional boost and remained supportive. However, the ongoing relentless fall in the US Treasury bond yields to historic lows held investors from placing aggressive bullish bets and kept a lid on any strong gains.

In fact, the yield on the benchmark US 10-year government bond dropped below the 1% handle in the wake of the Fed’s surprise 50bps rate cut on Tuesday. The Fed delivered an emergency rate cut to cushion the potential impact from the spread of coronavirus on the economy.

It will now be interesting to see if the pair is able to capitalize on the recovery or meets with some fresh supply at higher levels – reaffirming the near-term bearish bias – as market participants now look forward to important US macro releases for a fresh impetus.

Wednesday’s US economic docket highlights the release of the ADP report on private-sector employment, which will be followed by the ISM Non-Manufacturing PMI. This might eventually influence the USD price dynamics and produce some meaningful trading opportunities.

Technical levels to watch