USD/JPY defends 113.00 on firmer yields amid Omicron, Fed woes

• USD/JPY refreshes intraday top while extending the bounce off seven-week low.
• Yields recover as Fed’s Powell pushes for faster tapering, cites risk of more persistent inflation.
• Mixed concerns over South African strain of covid also underpin the safe-havens.
• US ISM Manufacturing PMI, Powell’s testimony 2.0 will offer fresh impulse, virus updates are important as well.

USD/JPY consolidates the previous day’s losses, on the bids around an intraday high of 113.45 during the initial hours of Tokyo open on Wednesday.

The yen pair dropped to the multi-day low the previous day amid the market’s rush for risk safety and a less responsive US dollar before the Fed Chairman Powell’s testimony. However, Powell’s hawkish comments join the market’s anxiety over Omicron and offer the latest strength to the quote.

Risk appetite weakened Tuesday on comments from Moderna’s Chief Stéphane Bancel who said, per the Financial Times (FT), “that existing vaccines will be much less effective at tackling Omicron than earlier strains of Covid-19 and warned it would take months before pharmaceutical companies can manufacture new variant-specific jabs at scale.” Though, representatives of Pfizer and Oxford tried placating market fears while citing no such evidence supporting the fact that the current jab will not be able to contain the virus strain.

Other than the indecision over the South African strain of the coronavirus and the capacity of the current vaccines, a nine-month low of the US CB Consumer Confidence and softer housing data also helped USD/JPY bears. However, Fed’s Powell pulled the US Dollar Index (DXY) back from the weekly low while saying, “It is time to retire the term ‘transitory’ for inflation." The corrective pullback also gained momentum as Powell cited the risk of more persistent inflation and signals for discussing faster taper in the December meeting.

At home, Japan’s Jibun Bank Manufacturing PMI rose past 54.2 initial forecast to 54.5 for November while the first case of Omicron in Kagoshima Prefecture escalate COVID-19 fears at home.

Against this backdrop, US 10-year Treasury yields add over four basis points (bps) to extend bounce off three-month low to 1.485% whereas the US stock futures and Japan’s Nikkei 225 print mild gains at the latest.

Given the market’s indecision, today’s second testimony by Fed Chair Powell and US ADP Employment Change for November, coupled with the US ISM Manufacturing PMI for the said month, will be crucial for USD/JPY traders. Above all, covid updates and moves of the US treasury yields are the key for the pair.

Technical analysis

Although the previous resistance line from March restricts short-term USD/JPY declines around 112.80-75, recovery remains elusive until the quote stays below the 20-DMA level of 114.00.