USD/JPY trades with modest losses below mid-115.00s, downside seems limited

• USD/JPY witnessed two-way price moves during the first half of the trading on Wednesday.
• Softer US bond yields kept the USD bulls on the defensive and capped the upside for the pair.
• The risk-on impulse undermined the safe-haven JPY and helped limit any meaningful decline.

The USD/JPY pair remained on the defensive through the early European session and was last seen trading with modest intraday losses, just below the 115.50 region.

The pair witnessed some intraday selling on Wednesday and retreated over 35 pips from the 115.65-115.70 area, or the high touched on January 28, though the pullback lacked follow-through. A downtick in the US Treasury bond yields undermined the US dollar and exerted some pressure on the USD/JPY pair. The downside, however, remained cushioned amid the risk-on impulse in the markets, which tends to weigh on the safe-haven Japanese yen.

The yield on the benchmark 10-year US government US Treasury bond yields moved away from the highest level since August 2019 touched on Tuesday and kept the USD bulls on the defensive. That said, rising bets for a 50 bps Fed rate hike in March should act as a tailwind for the US bond yields and the greenback. This, in turn, was seen as a key factor that assisted the USD/JPY pair to find decent support near the 115.30 region.

Investors seem convinced that the US central bank would adopt a more aggressive policy response to combat stubbornly high inflation. Hence, the market focus will remain glued to the release of the US CPI report on Thursday, which could influence the Fed's near-term policy outlook. This, in turn, would play a key role in driving the near-term USD demand and help determine the next leg of a directional move for the USD/JPY pair.

In the meantime, traders are likely to take cues from the US bond yields and the USD price dynamics amid absent relevant market moving economic releases from the US. Apart from this, the broader market risk sentiment will also be looked upon for some short-term trading opportunities around the USD/JPY pair.

Technical levels to watch