USD/JPY remains on the defensive around 122.60 area, downside seems limited

• USD/JPY witnessed some selling on Tuesday, though the downtick lacked follow-through.
• The widening US-Japanese yield spread acted as a tailwind and helped limit deeper losses.
• Traders now eye the US ISM Services PMI for some impetus ahead of the FOMC minutes.

The USD/JPY pair recovered a few pips from the daily low and was seen trading just above mid-122.00s during the early European session, down over 0.20% for the day.

Having struggled to move back above the 123.00 round-figure mark, the USD/JPY pair edged lower on Tuesday amid speculation that officials would respond to the Japanese yen's recent weakness. In fact, the Bank of Japan Governor Haruhiko Kuroda mentioned the word ‘intervention’ during a speech earlier today, which, in turn, triggered a fall in the major.

Apart from this, the uncertainty over Ukraine continued weighing on investors' sentiment and drove some haven flows towards the JPY. That said, Kuroda reiterated that the central bank will offer to buy an unlimited amount of 10-year JGBs if the rise in long-term interest rates is rapid. This, in turn, assisted the USD/JPY pair to find support near the 122.35 area.

On the other hand, expectations that the Fed would tighten its monetary policy at a faster pace continued underpinning the US dollar. In fact, the markets have been pricing in a 100 bps Fed rate hike move over the next two meetings. This was reinforced by elevated US Treasury bond yields, which was seen as another factor that acted as a tailwind for the USD/JPY pair.

Hence, the market focus will remain glued to the FOMC monetary policy meeting minutes, scheduled for release on Wednesday. In the meantime, fresh developments surrounding the Russia-Ukraine saga could influence the USD/JPY pair. Apart from this, the US ISM Services PMI should produce some short-term trading opportunities later during the early North American session.

Technical levels to watch