USD/JPY reverses an intraday dip to 113.00 mark

• USD/JPY witnessed an intraday pullback from multi-year tops touched earlier this Tuesday.
• The risk-off impulse benefitted the safe-haven JPY and prompted bulls to take some profits.
• A combination of factors should help limit any meaningful corrective pullback for the major.

The USD/JPY pair refreshed daily lows during the early European session, albeit managed to defend the 113.00 mark and quickly recovered few pips thereafter. The pair was last seen hovering around the 113.20-25 region, nearly unchanged for the day.

Worries of a faster than expected rise in inflation and signs of a slowdown in the global economic recovery have been fueling concerns about stagflation. Apart from this, the contagion risks from China Evergrande's debt crisis took its toll on the global risk sentiment. This, in turn, benefitted the safe-haven Japanese yen and triggered an intraday turnaround for the USD/JPY pair from mid-113.00s, or the highest level since December 2018 touched earlier this Tuesday.

Apart from this, a modest US dollar pullback from the vicinity of one-year tops exerted some downward pressure on the USD/JPY pair. That said, prospects for an early policy tightening by the Fed continued acting as a tailwind for the greenback and helped limit any deeper losses for the major, at least for now. Despite Friday's disappointing headline NFP print, investors seem convinced that the Fed might still begin tapering its bond purchases as soon as November.

The markets have also started pricing in the prospects for an interest rate hike in 2022 to counter the risk of inflation becoming too high. This was evident from the recent surge in the US Treasury bond yields, pushing the yield on the benchmark 10-year US government bond to four-month tops on Friday. On the other hand, the yield on the 10-year Japanese government bond remained near zero amid the Bank of Japan's yield curve control policy.

This has resulted in the widening of the US-Japanese yield differential, which could undermine the Japanese yen and further lend support to the USD/JPY pair. The fundamental backdrop favours bullish traders, though overbought conditions on short-term charts seemed to be the only factor capping the upside. That said, any meaningful pullback might still be seen as a buying opportunity and is more likely to remain limited.

Technical levels to watch