USD/JPY flirts with daily low, around 114.70-65 region

• USD/JPY witnessed aggressive long-unwinding trade on Friday amid the risk-off impulse.
• The new COVID-19 variant spooks investors and triggers a sharp fall in the equity markets.
• Retreating US bond yields kept the USD bulls on the defensive and added to the selling bias.

The USD/JPY pair maintained its heavily offered tone heading into the European session and was last seen hovering near the lower end of its daily trading range, around the 114.70-65 region.

The detection of a new and possibly vaccine-resistant coronavirus variant triggered a fresh wave of the global risk-aversion trade. This was evident from a sharp drop in the equity markets, which forced investors to take refuge in traditional safe-haven assets, including the Japanese yen. This, in turn, was seen as a key factor that led to aggressive long-unwinding trade around the USD/JPY pair.

Meanwhile, The global flight to safety led to a steep decline in the US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond fell over 5% and kept the US dollar bulls on the defensive and dragged the USD/JPY pair further away from a near five-year top set in the previous day. However, expectations for an early policy tightening by the Fed could help limit further losses.

The markets seem convinced that the Fed would be forced to raise interest rates sooner rather than later to contain stubbornly high inflation. The bets were reinforced by hawkish FOMC minutes on Wednesday, which revealed that policymakers were open to speeding up the tapering of the bond-buying program and moving quickly to raise interest rates if high inflation persists.

Even from a technical perspective, the USD/JPY pair, so far, has shown some resilience below the 200-hour SMA. In the absence of any major market-moving economic releases, traders might refrain from positioning for any further depreciating move. This makes it prudent to wait for a strong follow-through selling before confirming that the recent strong bullish trajectory has run out of steam.

Technical levels to watch