USD/JPY bounces off daily low, keeps the red below mid-128.00s amid risk-off mood

• USD/JPY comes under fresh selling pressure and is weighed down by a combination of factors.
• The risk-off mood benefits the safe-haven JPY and acts as a headwind amid a softer greenback.
• The BoJ’s dovish policy decision on Wednesday warrants caution for aggressive bearish traders.

The USD/JPY pair extends the previous day's sharp retracement slide from the 131.55-131.60 area, or the weekly high and remains under some selling pressure on Thursday. The pair, however, recovers a few pips from the daily low and is currently placed just below mid-128.00s, still down nearly 0.50% for the day.

The prevalent risk-off mood - as depicted by a sea of red across the equity markets - benefits the safe-haven Japanese Yen and exerts some downward pressure on the USD/JPY pair. Investors remain concerned about headwinds stemming from the worst yet COVID-19 outbreak in China. This, along with the protracted Russia-Ukraine war, has been fueling worries about a deeper global economic downturn.

Furthermore, the weaker US economic data released on Wednesday sparks recession fears and weigh on investors' sentiment. Meanwhile, The anti-risk flow, along with bets for smaller Fed rate hikes, drag the yield on the rate-sensitive two-year US government bond to its lowest level since October. This keeps the US Dollar bulls on the defensive and fails to lend support to the USD/JPY pair.

The downside, however, seems limited, at least for the time being, in the wake of the Bank of Japan's (BoJ) dovish policy decision on Wednesday. In fact, the Japanese central bank maintained ultra-low interest rates and left its yield curve control measures unchanged, defying expectations for more hawkish signals. This, in turn, warrants caution for aggressive bearish traders and before positioning for the resumption of the recent downtrend witnessed over the past three months or so.

Market participants now look forward to the US economic docket, featuring the Philly Fed Manufacturing Index, the usual Weekly Initial Jobless Claims and housing market data. This, along with speeches by influential FOMC members and the US bond yields, will drive the USD demand and provide some impetus to the USD/JPY pair. Traders will further take cues from the broader market risk sentiment to grab short-term opportunities around the major.

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