USD/JPY struggles for direction, consolidates in a range below 114.00 mark

• USD/JPY oscillated in a range through the Asian session on the first day of a new week.
• Friday’s dismal US data, sliding US bond yields weighed on the USD and capped gains.
• A combination of factors undermined the JPY and helped limit the downside for the pair.

The USD/JPY pair lacked any firm directional bias and seesawed between tepid gains/minor losses below the 114.00 mark through the Asian session.

A combination of diverging forces failed to provide any meaningful impetus to the USD/JPY pair, instead led to a subdued/range-bound price action on the first day of a new trading week. The US dollar remained on the defensive after data released on Friday showed that US consumer sentiment plunged to a 10-year low in November amid surging inflation. Apart from this, retreating US Treasury bond yields further undermined the greenback.

On the other hand, the cautious mood around the equity markets benefitted the safe-haven Japanese yen and acted as a headwind for the USD/JPY pair. That said, the disappointing GDP print from Japan kept a lid on any meaningful gains for the JPY and extended some support to the major. The Preliminary estimate showed that the economy contracted more than expected, by 0.8% in the three months through September and 3.0% on an annualized basis.

This marked the first downturn in two quarters as a COVID-19 state of emergency snapped consumer spending and boosted expectations for Prime Minister Fumio Kishida’s stimulus package. Apart from this, dovish comments by Bank of Japan (BoJ) Governor Haruhiko Kuroda held back traders from placing aggressive bearish bets around the USD/JPY pair. Kuroda noted that the BoJ won't abandon easy monetary policy even if Japan CPI hits 1% next year.

On the other hand, the markets have been pricing in the prospects for an early policy tightening by the Fed amid a faster-than-expected rise in inflationary pressure. In fact, the Fed funds futures indicate a 50% probability of a rate hike in July 2022 and a high likelihood of another by November. This should help limit the USD losses and also warrants some caution before placing any aggressive bearish bets around the USD/JPY pair.

Market participants now look forward to the US economic docket, featuring the only release of the Empire State Manufacturing Index. This, along with the US bond yields, will influence the USD price dynamics. Traders will further take cues from the broader market risk sentiment for some short-term opportunities around the USD/JPY pair.

Technical levels to watch