USD/JPY edges lower to 115.20 area, focus remains on Russia-Ukraine conflict

• USD/JPY witnessed selling on Friday and reversed a part of the overnight strong recovery move.
• The USD moved away from the highest level since June 2020 and exerted downward pressure.
• The cautious optimism could undermine the safe-haven JPY and limit deeper losses for the pair.

The USD/JPY pair remained depressed heading into the European session and was last seen hovering near the lower end of its daily trading range, around the 115.20 region.

The pair struggled to capitalize on the overnight strong intraday recovery of nearly 130 pips from the 114.40 area, or the three-week low and met with a fresh supply on the last day of the week. The downtick could be solely attributed to the ongoing US dollar pullback from the highest level since June 2020, touched in reaction to Russia's invasion of Ukraine on Thursday.

Despite the recent geopolitical developments, the fact that the new economic sanctions on Russia were not as harsh as feared dented the greenback's status as the global reserve currency. This, in turn, was seen as a key factor that exerted some downward pressure on the USD/JPY pair, though the downside seems cushioned amid optimism over Putin-Zelenskyy meet on likely ceasefire.

Russian President's press secretary Dmitry Peskov said that Putin was ready to talk with Ukrainian President Volodymyr Zelenskyy if the latter agrees to compromise on Russia’s red line issues. Moreover, reports indicated that Russian troops have stopped advancing in most directions. This could undermine the safe-haven Japanese yen and lend support to the USD/JPY pair.

That said, the risk of a further escalation in the conflict between Russia and the West over Ukraine should keep investors on edge. The mixed fundamental backdrop warrants some caution for aggressive traders and before positioning for a firm near-term direction for the USD/JPY pair. Hence, the market focus will remain glued to fresh developments surrounding the Russia-Ukraine saga.

Market participants now look forward to the US economic docket, highlighting the release of the Fed's preferred inflation gauge - the core PCE Price Index - and Durable Goods Orders. The data, however, is likely to be overshadowed by geopolitics and do little to influence the USD price dynamics or provide any meaningful impetus to the USD/JPY pair.

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