USD/JPY snaps three-day downtrend above 115.00 even as yields retreat, inflation eyed

• USD/JPY extends bounce off one-week top, stays firmer around intraday high of late.
• North Korea again test-fires ballistic missile towards Japan, PM Kishida extends border restrictions until February.
• Fed’s Powell sounds optimistic on economics, Merck’s Molnupiravir mechanism to work against omicron, any covid variant.
• Powell’s testimony, yields and covid updates are in focus.

USD/JPY consolidates the recent losses around 115.30, rising for the first time in four days during early Tuesday.

The risk barometer pair portrays the market’s cautious optimism amid recently positive comments from the US Federal Reserve (Fed) Chairman Jerome Powell and on covid updates. However, the market’s inflation fears ahead of Wednesday’s US Consumer Price Index (CPI) data challenge the USD/JPY bulls.

With escalating covid numbers, Japan’s Prime Minister (PM) Fumio Kishida announced, per Kyodo News, “The Japanese government will further extend an entry ban on non-resident foreigners until the end of February.” The news also adds, “The ban has been in place since Nov. 30 after the country confirmed its first case of the highly transmissible Omicron variant of the coronavirus.”

Even so, the market’s sentiment remains firmer, weighing on US Treasury yields amid concerns relating to US economics and a cure for the coronavirus and its variants.

The hawkish comments from Fed Chair Jerome Powell, per the prepared remarks for today’s Testimony, could be considered as a major favor to the risk-on mood. The Fed Boss said, “The economy is growing at its fastest rate in years, and the labor market is robust,” to back his pledge to stop higher inflation from getting entrenched.

Additionally, comments from Merck’s official saying, “Expect Molnupiravir mechanism to work against omicron, any covid variant,” could also be cited as positive for the risk appetite.

It should, however, be noted that the market players remain cautious ahead of today’s testimony from Fed Chair Powell, as well as Wednesday’s US inflation data. Also challenging the risk appetite are the recently escalating covid cases and North Korea's frequent missile tests. Hence, USD/JPY licks its wounds but not out of the woods.

Technical analysis

With a clear downside break of an ascending trend line from December 17 and 10-DMA, respectively around 115.90 and 115.50, USD/JPY prices remain vulnerable to decline towards October’s peak of 114.70.