USD/JPY sticks to modest recovery gains, lacks follow-through beyond mid-114.00s

• USD/JPY quickly reversed an intraday dip to the weekly low and defended the 114.00 mark.
• A positive risk tone undermined the safe-haven JPY and helped the pair to regain traction.
• A fresh leg up in the US bond yields acted as a tailwind for the USD and remained supportive.

The USD/JPY pair held on to its intraday recovery gains and was last seen trading near the daily high, just below mid-114.00s during the early European session.

The pair attract some buying near the 114.00 mark, or the weekly low touched earlier this Thursday and was supported by a combination of factors. A recovery in the risk sentiment undermined the safe-haven Japanese yen and acted as a tailwind for the USD/JPY pair. Bulls further took cues from elevated US Treasury bond yields, which extended some support to the US dollar.

Firming expectations that the Fed would begin raising interest rates in March to contain stubbornly high inflation remained supportive of the recent runup in the US bond yields. The market bets were further reaffirmed by last week's data, which showed that the headline US CPI surged to the highest level since June 1982 and core CPI registered the biggest advance since 1991.

This, in turn, pushed the yield on the benchmark 10-year US government bond to the highest level since January 2020 on Wednesday. Moreover, the US 2-year notes, which are highly sensitive to rate hike expectations, surged past the 1.0% mark for the first time since February 2020. Hence, the focus will remain glued to the upcoming FOMC policy meeting on January 25-26.

The fundamental backdrop favours bullish traders, though the lack of a strong follow-through buying warrants some caution before positioning for any further gains. Market participants now look forward to the US economic docket – featuring the releases of Philly Fed Manufacturing Index, Weekly Initial Jobless Claims and Existing Home Sales data – for a fresh impetus.

This, along with the US bond yields, will influence the USD price dynamics. Apart from this, traders will take cues from the broader market risk sentiment for some short-term opportunities around the USD/JPY pair.

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