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  • A combination of diverging forces failed to provide any meaningful impetus to USD/JPY.
  • The Fed’s stubbornly dovish kept the USD bulls on the defensive and capped the upside.
  • The risk-on mood, COVID-19 jitters, softer data undermined the JPY and helped limit losses.

The USD/JPY pair lacked any firm directional bias and seesawed between tepid gains/minor losses through the first half of the trading action on Monday. The pair was last seen hovering around the 109.75 region, nearly unchanged for the day heading into the European session.

The pair witnessed some selling on the first day of a new trading week and moved further away from the highest level since April 6, around the 110.20 region touched on Friday. Despite stronger US inflation data, the Fed’s stubbornly dovish view that recent price pressures should prove temporary calmed investor’s nerves. This was evident from a sharp pullback in the US Treasury bond yields, which acted as a headwind for the US dollar and prompted some selling around the USD/JPY pair.

That said, a combination of factors held traders from placing any aggressive bearish bets and helped limit any deeper losses, at least for the time being. The underlying bullish sentiment in the financial markets continued undermining the safe-haven Japanese yen, which was further weighed down by softer domestic data. In fact, Japan’s Industrial Production rose 2.5% MoM and Retail Sales increased by 12.0% YoY in April, though the readings were well short of consensus estimates.

The data comes after Japan extended a state of emergency in Tokyo and eight other prefectures by about 3 weeks to June 20. This, in turn, validated market worries that the recent rise in COVID-19 cases could hinder Japan’s fragile economic recovery, which kept the JPY bulls on the defensive and extended some support to the USD/JPY pair. Investors also seemed reluctant, rather preferred to wait on the sidelines amid relatively thin liquidity conditions on the back of a holiday in Britain and the US. This was seen as another factor that contributed to the subdued/range-bound price action.

Technical levels to watch