USD/JPY retreats from multi-year peak amid sliding US bond yields, softer risk tone

• USD/JPY surged to a fresh multi-year peak in reaction to the BoJ’s intervention on Monday.
• Extremely overbought conditions prompted profit-taking amid retreating US bond yields.
• The Fed-BoJ policy divergence acted as a tailwind for the major and favours bullish traders.

The USD/JPY pair trimmed a part of its strong intraday gains to the multi-year peak and was last seen trading around the 123.80 region, still up nearly 1.5% for the day.

The pair caught aggressive bids on the first day of a new week after the Bank of Japan (BoJ) steeped in to arrest the continuous rise in yields. In fact, the BoJ made two offers in a single day to buy unlimited amounts of 10-year Japanese government bonds (JGBs) to protect the 0.25% tolerance ceiling under its yield curve control policy. This, in turn, weighed heavily on the Japanese yen and pushed the USD/JPY pair to the 125.00 psychological mark for the first time since August 2015.

The momentum was further fueled by a broad-based US dollar strength, bolstered by rising bets for a 50 bps Fed rate hike move in the May meeting. That said, a combination of factors prompted traders to take some profits off the table. The lack of progress in the Russia-Ukraine peace negotiations, along with the imposition of fresh COVID-19 restrictions in China, weighed on investors' sentiment. This, along with an intraday pullback in the US Treasury bond yields, capped the USD/JPY pair.

This comes on the back of the recent blowout rally of over 1000 pips from the monthly low, around the 114.65 area, and forced investors to lighten their bullish bets. The downside, however, remains cushioned amid the divergence monetary policy stance adopted by the Fed and the BoJ. The fundamental backdrop favours bullish traders, suggesting that the intraday fall of around 100-150 pips could still be categorized as a corrective pullback amid extremely overbought conditions.

In the absence of any major market-moving economic releases, the incoming geopolitical headlines might provide some impetus to the USD/JPY pair. Traders will further take cues from the US bond yields, which will influence the USD price dynamics. This, in turn, should produce some meaningful opportunities ahead of the release of the Japanese Unemployment Rate and BoJ Summary of Opinions, due during the Asian session on Tuesday.

Technical levels to watch