USD/JPY keeps the red below 116.00, downside seems limited ahead of FOMC minutes

• USD/JPY edged lower on Wednesday and eroded a part of the overnight gains to a multi-year high.
• A softer risk tone benefitted the safe-haven JPY and exerted pressure amid sliding US bond yields.
• Investors now look forward to the US macro releases and the FOMC minutes for a fresh impetus.

The USD/JPY pair maintained its offered tone through the early part of the European session and was last seen trading near the daily low, just below the 116.00 mark.

The pair witnessed some selling on Wednesday and moved away from a five-year high touched in the previous day amid a softer risk tone. An extended selloff in the US bond markets led to the overnight corrective pullback in the US tech stocks. The spillover effect was evident from a generally weaker trading sentiment around the equity markets, which, in turn, drove some haven flows towards the Japanese yen.

On the other hand, retreating US Treasury bond yields kept the US dollar bulls on the defensive and exerted additional pressure on the USD/JPY pair. The downside, however, remains cushioned amid the recent widening of the US-Japanese yield differential. In fact, the yield on the benchmark 10-year government bond shot to the highest level since November 24 amid expectations for a faster policy tightening by the Fed.

the money markets have been pricing in the possibility for an eventual liftoff by May and two more rate hikes by the end of 2022. This was reinforced by the fact that the US 2-year notes, which are sensitive to rate hike expectations along with 5-year notes, soared to the highest since February 2020. Conversely, the yield on the 10-year Japanese government bond remained near zero due to the Bank of Japan's yield curve control policy.

Hence, the focus will remain on Wednesday's release of the FOMC monetary policy meeting minutes, due later during the US session. In the meantime, traders might take cues from the US macro data – the ADP report on private-sector employment, Building Permits and the final Services PMI. Apart from this, the US bond yields might influence the USD price dynamics, which along with the broader risk sentiment should provide some impetus to the USD/JPY pair.

Technical levels to watch