USD/JPY bounces off low, keeps the red just below 122.00 mark amid weaker USD

• USD/JPY corrected sharply from the fresh multi-year peak touched earlier this Friday.
• Modest USD weakness turned out to be a key factor that prompted some profit-taking.
• The Fed-BoJ monetary policy divergence, elevated US bond yields helped limit losses.

The USD/JPY pair quickly recovered a few pips from the daily low and was last seen trading just below the 122.00 round-figure mark, still down over 0.35% for the day.

The pair witnessed an intraday turnaround from the vicinity of mid-122.00s, or the highest level since December 2015 touched earlier this Friday and reversed a major part of the overnight strong gains. The sharp pullback could be solely attributed to some profit-taking amid extremely overbought conditions and modest US dollar weakness.

That said, a combination of factors helped limit deeper losses and assisted the USD/JPY pair to attract some buying near the 121.20-121.15 region. A generally positive tone around the equity markets, along with the divergence between the Bank of Japan and the Fed monetary policy outlooks, acted as a headwind for the safe-haven Japanese yen.

In fact, a slew of influential FOMC members, including Fed Chair Jerome Powell, left the door open for a larger rise in borrowing costs to bring down unacceptably high inflation. The markets were quick to react and started pricing in the possibility of a 50 bps rate hike at the upcoming policy meeting in May. This, in turn, pushed the yield on the benchmark 10-year US government bond back closer to the 22-month high touched earlier this week.

Conversely, the Japanese 10-year bond yield remained anchored below the BoJ's 0.25% ceiling amid the ultra-loose policy stance adopted by the Japanese central bank. This, in turn, resulted in the further widening of the US-Japanese bond yield spread, which favours bulls and supports prospects for an extension of the USD/JPY pair's strong bullish trend.

Nevertheless, the pair, for now, seems to have snapped five successive days of the winning streak and remains at the mercy of the USD price dynamics. Market participants now look forward to the US economic docket, featuring the release of revised Michigan Consumer Sentiment Index and Pending Home Sales data later during the North American session.

Apart from this, the US bond yields will influence the USD and provide some impetus to the USD/JPY pair. Traders will further take cues from fresh developments surrounding the Russia-Ukraine saga, which will continue to play a key role in driving the broader market risk sentiment and demand for traditional safe-haven assets, including the JPY.

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