USD/JPY flirts with 113.00 mark, near three-week low amid risk-off

• USD/JPY witnessed fresh selling on Tuesday and dropped to a near three-week low.
• The risk-off mood benefitted the safe-haven JPY and exerted pressure on the major.
• Declining US bond yields weighed on the USD and contributed to the ongoing slide.

The USD/JPY pair dropped to a near three-week low heading into the European session, with bears still awaiting sustained weakness below the 113.00 round-figure mark.

The pair struggled to capitalize on its early positive move and once again met with fresh supply in the vicinity of the 114.00 mark. The global risk sentiment took a hit amid worries about the potential economic fallout from the spread of a new vaccine-resistant variant of the coronavirus – Omicron. This was evident from a fresh leg down in the equity markets, which boosted demand for the safe-haven Japanese yen and exerted downward pressure on the USD/JPY pair.

The already weaker sentiment deteriorated further after Moderna’s Chief Executive Stéphane Bancel predicted that existing vaccines will be much less effective at tackling Omicron than earlier strains of Covid-19. Bearish traders further took cues from the ongoing steep decline in the US Treasury bond yields, which weighed heavily on the US dollar. This was seen as another factor that contributed to the USD/JPY pair's slide to the lowest level since November 10.

In fact, the yield on the benchmark 10-year US government bond dropped back closer to the 1.45% threshold amid reduced bets for an early policy tightening by the Fed. Despite the negative factors, the USD/JPY pair, so far, has been showing some resilience below the 113.00 round figure. This warrants some caution for bearish traders and before positioning for an extension of last week's sharp pullback from a near five-year high, around mid-115.00s.

Market participants now look forward to the US economic docket, highlighting the release of the Conference Board's Consumer Confidence Index later during the early North American session. The key focus, however, will remain on Fed Chair Jerome Powell's testimony before the Senate Banking Committee. This will influence market expectations about the Fed's next policy move and produce some meaningful trading opportunities around the USD/JPY pair.

Technical levels to watch