USD/JPY flat-lined below mid-114.00s, traders eye US data for some impetus

• USD/JPY attracted dip-buying near 114.00 on Thursday, though lacked bullish conviction.
• Stability in the equity markets undermine the safe-haven JPY and extended some support.
• Elevated US bond yields revived the USD demand and also acted as a tailwind for the pair.

The USD/JPY pair had good two-way price moves through the mid-European session and was last seen trading in the neutral territory, around the 114.30 region.

A combination of supporting factors assisted the USD/JPY pair to defend the 114.00 mark and stage a goodish intraday bounce from the weekly low set earlier this Thursday. Signs of stability in the equity markets undermined the safe-haven Japanese yen. This, along with the recent widening of the US-Japanese government bond yield differential, acted as a tailwind for the major.

In fact, the yield on the 10-year Japanese government bond remained near zero due to the Bank of Japan's yield curve control policy. Conversely, the yield on the benchmark 10-year US government bond shot to the highest level since January 2022 on Wednesday amid growing market acceptance that the Fed would begin raising interest rates in March to combat stubbornly high inflation.

Moreover, the US 2-year notes, which are highly sensitive to rate hike expectations, held steady above the 1.0% threshold, or the highest level since February 2020. This, in turn, helped revive the US dollar demand, which further extended some support to the USD/JPY pair. Bulls, however, struggled to capitalize on the intraday uptick or find acceptance above mid-114.00s.

The lack of follow-through buying suggests that investors now seem reluctant to place aggressive bets ahead of the upcoming FOMC policy meeting on January 25-26. This warrants some caution before confirming that the recent pullback from the 116.35 area, or a five-year high touched earlier this January, has run its course and positioning for any meaningful gains.

Market participants now look forward to the US economic docket – featuring the releases of the Philly Fed Manufacturing Index, Weekly Initial Jobless Claims and Existing Home Sales data. This, along with the US bond yields, will drive the USD demand. Apart from this, the broader market risk sentiment should produce some trading opportunities around the USD/JPY pair.

Technical levels to watch