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  • A combination of factors prompted some selling around USD/JPY on Wednesday.
  • A cautious mood benefitted the safe-haven JPY amid a subdued USD price action.
  • The downside seems cushioned as the focus remains on the FOMC policy decision.

The USD/JPY pair broke down of its consolidative trading range and dropped below the key 110.00 psychological mark during the early European session.

Having stalled its recent positive move near a descending trend-line resistance, the USD/JPY pair edged lower on Wednesday and moved away from over one-week tops touched in the previous day. The downtick was sponsored by a combination of factors, though the downside seems limited ahead of the highly-anticipated FOMC policy decision.

Investors turned cautious heading into the key event risk, which was evident from a softer tone around the equity markets. This, in turn, benefitted the safe-haven Japanese yen and exerted some pressure on the USD/JPY pair. Bearish traders further took cues from a downtick in the US Treasury bond yields, which kept the US dollar bulls on the defensive.

That said, expectations for a less dovish Fed might help put a tentative floor under the greenback and extend some support to the USD/JPY pair. Investors might have started pricing in the prospects for an earlier stimulus withdrawal amid worries about rising inflationary pressure, further fueled by Tuesday’s hotter-than-expected US Producer Price Index.

Hence, market participants will look for clues about a possible change in the policy outlook and if members have started the discussion to taper the current $120 billion in monthly bond purchases. This will play a key role in influencing the near-term USD price dynamics and assist traders to determine the next leg of a directional move for the USD/JPY pair.

In the meantime, the broader market risk sentiment, along with the US bond yields might provide some impetus and allow traders to grab some short-term opportunities around the USD/JPY pair.

Technical levels to watch