USD/JPY recovers further from near two-month low, climbs above mid-113.00s

• A combination of supporting factors allowed USD/JPY to recover further from a two-month low.
• A modest recovery in the risk sentiment undermined the safe-haven JPY and remained supportive.
• Bulls further took cues from an uptick in the US bond yields, though a softer USD could cap gains.

The USD/JPY pair maintained its bid tone heading into the European session and was last seen trading near daily highs, around the 113.60 region.

Following the overnight volatile price swings, the USD/JPY pair gained some positive traction on Wednesday and was supported by a combination of factors. The global risk sentiment stabilized a bit as investors preferred to wait and see if the new Omicron coronavirus variant would eventually derail the economic recovery. This was evident from a goodish recovery in the equity markets, which undermined the safe-haven Japanese yen and acted as a tailwind for the major.

Bulls further took cues from some follow-through recovery in the US Treasury bond yields, bolstered by Fed Chair Jerome Powell's hawkish comments. Testifying before the Senate Banking Committee, Powell said it's time to retire the word transitory and it is appropriate to consider wrapping up the taper of our asset purchases, perhaps a few months sooner. He further added that the risk of persistently higher inflation has increased and expects high inflation through next year.

Reacting to Powell's remarks, the money markets started pricing in the possibility of at least a 50 bps rate hike by the end of 2022. This, in turn, was seen as a key factor that continued underpinning the US bond yields. Despite rising bets for a more aggressive policy tightening by the Fed, the US dollar, so far, has struggled to attract any meaningful buying. This could hold back traders from placing aggressive bullish bets and cap the USD/JPY pair’s ongoing recovery from a near two-month low.

Market participants now look forward to the US economic docket, featuring the release of the ADP report and ISM Manufacturing PMI. Apart from this, Fed Chair Jerome Powell and US Treasury Secretary Janet Yellen's joint testimony before the House Financial Services Committee will influence the USD price dynamics. Traders will further take cues from developments surrounding the coronavirus saga and the broader market risk sentiment to grab some opportunities around the USD/JPY pair.

Technical levels to watch