USD/JPY bounces off multi-month low, keeps the red above 138.00 amid weaker USD

• USD/JPY dives to a fresh three-month low on Monday and is pressured by a combination of factors.
• Bets for less aggressive Fed rate hikes and sliding US bond yields continue to weigh on the USD.
• The risk-off mood benefits the safe-haven JPY and also contributes to the sharp intraday decline.

The USD/JPY pair kicks off the new week on a downbeat note and dives to a fresh three-month low during the mid-European session. Spot prices, however, rebound a few pips from the 137.50 area and climb back above the 138.00 mark in the last hour.

The US Dollar fails to capitalize on its modest intraday uptick and comes under heavy selling pressure amid the prospects for a less aggressive policy tightening by the Fed. In fact, the USD Index, which measures the greenback's performance against a basket of currencies, dives back closer to the monthly low and turns out to be a key factor exerting pressure on the USD/JPY pair.

The November FOMC meeting minutes released last week cemented bets for a relatively smaller 50 bps rate hike by the US central bank in December. This is reinforced by the ongoing downfall in the US Treasury bond yields, narrowing the US-Japan rate differential. Apart from this, the risk-off mood benefits the safe-haven Japanese Yen and contributes to the USD/JPY pair's intraday decline.

Investors remain worried about a new COVID-19 outbreak in China and the imposition of strict lockdown measures in several cities. Furthermore, a wave of protests in China over the government’s zero-COVID policy takes its toll on the risk sentiment. Apart from this, technical selling below last week's swing low, around the 138.00 mark, aggravates the bearish pressure surrounding the USD/JPY pair.

That said, the Fed-BoJ policy divergence helps limit deeper losses and assists spot prices to find decent support near the mid-137.00s, at least for the time being. In the absence of any relevant economic data from the US, traders on Monday will take cues from speeches by influential FOMC members - St. Louis Fed President James Bullard and New York Fed President John Williams.

This, along with the US bond yields, will drive the USD demand and provide some impetus to the USD/JPY pair. Adding to this, the broader risk sentiment should allow traders to grab short-term opportunities ahead of the Japanese Unemployment Rate and Retail Sales figures, due for release during the Asian session on Tuesday.

Technical levels to watch