USD/JPY surrenders early gains to over one-month high, flirts with 115.00 mark

• USD/JPY struggled to capitalize on its intraday positive move to an over one-month high.
• The risk-on mood undermined the safe-haven JPY and extended some support to the major.
• The USD drew some support from rallying US bond yields and further helped limit the slide.

The USD/JPY pair dropped to a fresh daily low during the mid-European session, with bears now awaiting a sustained break below the key 115.00 psychological mark.

The pair struggled to capitalize on its intraday positive move and witnessed a modest pullback from the 115.35 region, or the highest level since November 26 touched earlier this Monday. The intraday slide lacked any obvious fundamental catalyst and could be solely attributed to some profit-taking, especially after the recent strong runup of nearly 300 pips over the past one month or so. That said, a combination of factors should limit the downside for the USD/JPY pair.

The optimism over signs that the Omicron variant might be less severe than feared and is unlikely to derail the economic recovery helped offset worries about the continuous surge in new COVID-19 cases. This was evident from a generally positive tone around the equity markets, which should act as a headwind for the safe-haven Japanese yen. Apart from this, a modest US dollar strength and a fresh leg up in the US Treasury bond yields could extend support to the USD/JPY pair.

In fact, the yield on the benchmark 10-year US government bond shot back to 1.54% and might now be eyeing a near one-month high touched last week. This, along with the Fed's hawkish outlook, indicating at least three rate hikes in 2022, assisted the USD to regain positive traction and reverse a major part of Friday's slide. Despite the supporting factors, the USD/JPY pair lacked bullish conviction amid quiet holiday trading on the back of an extended weekend in the US.

Investors also seemed reluctant to place aggressive directional bets, instead preferred to lighten their bullish positions ahead of important US macro data scheduled at the beginning of a new month. This week's US economic docket highlights the release of ISM PMIs and the ADP report on private-sector employment. The focus, however, will remain on the closely-watched US monthly jobs report (NFP) on Friday, which should provide a fresh impetus to the USD/JPY pair.

Technical levels to watch