USD/JPY holds steady above mid-113.00s, lacks bullish conviction amid Omicron fears

• USD/JPY struggled to gain any meaningful traction and remained confined in a range on Tuesday.
• Hawkish Fed expectations continued acting as a tailwind for the USD and extended some support.
• COVID-19 jitters underpinned the safe-haven JPY and capped gains amid declining US bond yields.

The USD/JPY pair oscillated in a narrow trading band through the Asian session and was last seen hovering in the neutral territory, just above mid-113.00s.

A combination of diverging forces failed to assist the USD/JPY pair to capitalize on the previous day's modest gains and led to a subdued/range-bound price move on Tuesday. The US dollar stood tall near a one-week high and remained well supported by the prospects for an early policy tightening by the Fed. That said, a generally softer risk tone underpinned the safe-haven Japanese yen and kept a lid on any further gains for the major.

The US CPI report for November released on Friday reaffirmed market expectations that the Fed would adopt a more aggressive policy response to contain stubbornly high inflation. In fact, the money markets indicate the possibility of liftoff by June 2022 and another hike as early as November. This, in turn, was seen as a key factor that continued acting as a tailwind for the greenback and extended some support to the USD/JPY pair.

Apart from this, renewed concerns about the economic risks emerging from the spread of the Omicron variant of the coronavirus tempered investors' appetite for riskier assets. This was evident from the prevalent cautious mood around the equity markets, which drove some haven flows towards the JPY. The flight to safety was evident from a further decline in the US Treasury bond yields, which further capped the upside for the USD/JPY pair.

Moving ahead, market participants now look forward to the release of the US Producer Price Index (PPI) later during the early North American session. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to the USD/JPY pair. Traders will further take cues from the broader market risk sentiment.

The key focus, however, will remain on the outcome of a two-day FOMC monetary policy meeting. The US central bank is scheduled to announce its decision on Wednesday, which will play a key role in driving the USD demand in the near term. Apart from this, developments surrounding the coronavirus saga would determine the next leg of a directional move for the USD/JPY pair.

Technical levels to watch