USD/JPY drops back closer to 115.00 mark on reports of shelling out of Ukraine

• A combination of factors dragged USD/JPY lower for the second successive day on Thursday.
• Russia-Ukraine tensions weighed on the risk sentiment and benefitted the safe-haven JPY.
• Bears also took cues from retreating US bond yields, though stronger USD helped limit losses.

The USD/JPY pair witnessed some selling during the latter part of the Asian session and dropped to a three-day low, around the 115.10 region in the last hour.

The pair added to the previous day's modest losses and remained under bearish pressure for the second successive day on Thursday amid renewed fears of a Russian invasion of Ukraine. The United States and NATO raised doubts on Russia's claim of a military pullback from the Ukraine border and said that there were no signs of de-escalation on the ground. This, in turn, kept a lid on the recent optimistic move in the markets, which continued benefitting the safe-haven Japanese yen and acted as a headwind for the USD/JPY pair.

The latest leg of a sudden drop over the past hour or so followed reports that Ukrainian forces have fired mortars and grenades on the LPR region. LPR is Luhansk People's Republic located in Luhansk Oblast in the Donbas region, a territory internationally recognized to be a part of Ukraine but run by Russian backed separatists. This, in turn, took its toll on the risk sentiment and triggered a fresh leg down in the equity markets, which forced investors to take refuge in traditional safe-haven assets, including the JPY.

The flight to safety led to modest pullback in the US Treasury bond yields, which was seen as another factor that inspired bearish traders and dragged the USD/JPY lower. That said, resurgent US dollar demand extended some support and helped limit any deeper losses, at least for the time being. The pair, so far, has held well within its weekly trading range. This further makes it prudent to wait for some follow-through selling below the weekly low, around the key 115.00 psychological mark before positioning for any further losses.

Nevertheless, the market focus will remain on geopolitical developments, which will continue to play a key role in influencing the broader market risk sentiment and driving demand for the safe-haven JPY. Later during the early North American session, traders will take cues from the US economic docket - featuring the releases of the Philly Fed Manufacturing Index, Weekly Initial Jobless Claims and housing market data. This, along with the US bond yields, should provide some impetus to the USD/JPY pair and produce short-term trading opportunities.

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