USD/JPY climbs back above mid-113.00s, reversing a major part of overnight slide

• A combination of factors assisted USD/JPY to regain positive traction on Thursday.
• Hawkish Fed expectations helped the USD to stall the post-US CPI corrective decline.
• The risk-on impulse undermined the safe-haven JPY and exerted additional support.

The USD/JPY pair climbed back above mid-113.00s during the Asian session and reversed a major part of the previous day's profit-taking slide from multi-year tops.

The US dollar witnessed aggressive selling on Wednesday and erased its weekly gains to 13-month tops amid the post-US CPI slide in the longer-dated US Treasury bond yields. The headline US CPI for September rose 0.4% in September as against 0.3% anticipated and lifted the yearly rate to 5.4%, again beating expectations for a reading of 5.3%. Investors, however, seem aligned with the Fed's transitory inflation narrative, which, in turn, dragged the US bond yields lower.

Nevertheless, the US CPI report reaffirmed market expectations for a potential interest rate hike in 2022. Moreover, the minutes of the latest FOMC monetary policy meeting held in September showed that the US central bank remains on track to begin tapering its bond purchases later this year. Apart from this, a modest rebound in the US bond yields acted as a tailwind for the greenback and assisted the USD/JPY pair to regain some positive traction on Thursday.

On the other hand, a generally positive tone around the equity markets undermined the safe-haven Japanese yen and was seen as another factor that exerted additional support to the USD/JPY pair. The fundamental backdrop seems tilted firmly in favour of bullish trades and the emergence of fresh buying reaffirms the positive outlook. That said, overbought RSI on short-term charts warrants some caution before positioning for any further appreciating move, at least for now.

Market participants now look forward to the US economic docket, featuring the release of the Producer Price Index (PPI) and the usual Weekly Initial Jobless Claims data. This, along with the US bond yields, will influence the USD price dynamics. Traders might further take cues from the broader market risk sentiment for some short-term opportunities around the USD/JPY pair.

Technical levels to watch