USD/JPY corrects from multi-year high, slides further below 118.00 mark

• USD/JPY witnessed some profit-taking from the multi-year high touched earlier this Tuesday.
• Retreating US bond yields weighed on the USD and prompted aggressive long-unwinding trade.
• The risk-off impulse benefitted the safe-haven JPY and further contributed to the selling bias.

The USD/JPY pair witnessed an intraday turnaround from the multi-year high and dropped to the 117.70 area during the early part of the European session.

A combination of factors prompted bulls to take some profit-taking off the table and led to the USD/JPY pair's corrective pullback from the 118.45 area, or the highest level since January 2017. A fresh wave of the global risk-aversion trade extended some support to the safe-haven Japanese yen. Apart from this, retreating US Treasury bond yields turned out to be another factor that inspired bearish traders and contributed to the intraday decline.

The market sentiment remains fragile in the wake of the risk of a further escalation in the Russia-Ukraine conflict and the latest COVID-19 outbreak in China. This, to a larger extent, overshadowed the latest optimism over a possible diplomatic resolution to end the war in Ukraine and triggered a slide in the equity markets. The anti-risk flow dragged the US bond yields lower, which undermined the US dollar and further weighed on the USD/JPY pair.

The downside, however, remains cushioned amid expectations for an imminent start of the policy tightening cycle by the Fed. The markets seem convinced that the recent geopolitical developments might do little to hold back the US central bank from hiking its target funds rate to rein in inflationary expectations. This should act as a tailwind for the US bond yields and supports prospects for the emergence of some USD dip-buying.

Conversely, the Bank of Japan (BoJ) is widely expected to maintain the current accommodative policy stance at its meeting on Friday. The divergence in the BoJ-Fed policy outlooks might continue to weigh on the JPY and lend support to the USD/JPY pair. Investors might also be reluctant to place aggressive bets heading into the key central bank event risks - the outcome of a two-day FOMC meeting and the BoJ policy decision on Friday.

Technical levels to watch