USD/JPY bounces off daily low amid modest USD strength, keeps the red near 129.20-25 zone

• A combination of supporting factors assisted USD/JPY to reverse an early dip to sub-129.00 levels.
• Aggressive Fed rate hike bets, rising US bond yields acted as a tailwind for the USD and the major.
• A softer risk tone underpinned the safe-haven JPY and might keep a lid on any meaningful upside.

The USD/JPY pair managed to rebound a few pips from the daily low and was last seen trading with modest losses, around the 129.25 region during the early European session.

Investors remain concerned that a more aggressive move by major central banks to curb inflation, the Russia-Ukraine war and the latest COVID-19 outbreak in China could hurt the global economic growth. This, in turn, triggered a fresh leg down in the equity markets, which benefitted the safe-haven Japanese yen and exerted some downward pressure on the USD/JPY pair. That said, a combination of factors helped limit any deeper losses, at least for the time being.

The markets seem convinced that the Fed would stick to its policy tightening path over the next few months to curb soaring inflation. The bets were reaffirmed by Fed Chair Jerome Powell's hawkish remarks on Tuesday, saying that he will back interest rate increases until prices start falling back toward a healthy level. This, in turn, pushed the US Treasury bond yields higher, which revived the US dollar demand and assisted the USD/JPY to reverse the early dip to sub-129.00 levels.

In contrast, the Bank of Japan has vowed to keep its existing ultra-loose policy settings and promised to conduct unlimited bond purchase operations to defend its “near-zero” target for 10-year yields. The resultant Fed-BoJ monetary policy divergence supports prospects for a further near-term appreciating move for the USD/JPY pair. Bulls, however, seemed reluctant to place aggressive bets, suggesting that spot prices might have already formed a near-term top around the 131.35 region.

Market participants now look forward to the US housing market data - Building Permits and Housing Starts - for some impetus later during the early North American session. Apart from this, the US bond yields will influence the USD price dynamics. Traders will further take cues from the broader market risk sentiment to grab short-term opportunities around the USD/JPY pair.

Technical levels to watch