USD/JPY fades bounce off five-week low around 114.00 despite firmer yields

• USD/JPY retreats after staging a recovery from the lowest levels since late December.
• Market sentiment remains sour amid pre-Fed caution, Russia-Ukraine tussles.
• Japan eyes to put 34 of 47 prefectures under quasi-emergency due to Omicron.
• US CB Consumer Confidence, risk catalysts eyed for fresh impulse, FOMC is the key.

USD/JPY portrays a failure to extend the previous day’s rebound near 114.00 as Tokyo opens for Tuesday. The yen pair bounced off a five-week low the previous day as risk-off mood propelled the US dollar. However, fears of widespread virus-linked quasi-emergency conditions in Japan triggered the risk barometer pair’s latest pullback.

That said, Japan’s surging covid cases push authorities to push more prefectures towards harder activity restrictions. The policymakers will decide on the same during Tuesday. “Japan will decide Tuesday to expand a COVID-19 quasi-state of emergency to 34 of the nation's 47 prefectures with the addition of 18 more areas to stem the rapid spread of the Omicron variant of the coronavirus,” said Kyodo News in this regard.

Market sentiment turned sour on Monday as traders piled on more bets over the US Federal Reserve’s (Fed) hawkish appearance during Wednesday’s Federal Open Market Committee (FOMC) meeting. Escalating the war of words over the geopolitical tussles between Russia and Ukraine also underpinned the risk aversion at the start of the key week.

The US, Europe and the North Atlantic Treaty Organization (NATO) push Russia towards a ceasefire amid reports that Moscow is up for a battle with Ukraine. As per the latest updates from the UK, leaders agreed that if Russia continues its intervention into Ukraine, allies must respond quickly, including through a package of sanctions.

Elsewhere, softer US Markit PMIs for January came in softer but Japan Jibun Bank Manufacturing PMI refreshed its four-year high on Monday.

That said, fears of supply chain disruptions and inflation woes were the major catalysts to propel the US Treasury yields and the US Dollar Index (DXY). US Treasury Secretary Janet Yellen accepted the same and praised Fed efforts, which in turn strengthened bullish bias over the FOMC.

Amid these plays, the US 10-year Treasury yields stay firmer around 1.77% while the US stock futures and Japan’s Nikkei 225 print mild gains at the latest.

Moving on, US CB Consumer Confidence for January, prior 115.8, will be crucial data for USD/JPY. However, major attention will be given to the risk catalysts.

Technical analysis

Unless staying beyond the previous resistance line from March 2021, around 112.80, USD/JPY buyers remain hopeful. However, a three-week-old resistance line near 114.45 restricts the pair’s short-term recovery.