USD/JPY remains on the defensive below mid-113.00s, downside seems cushioned

• A combination of factors prompted some selling around USD/JPY on Wednesday.
• Reviving safe-haven demand underpinned the JPY and exerted some pressure.
• Retreating US bond yields weighed on the USD and contributed to the selling bias.
• Hawkish Fed expectations should help limit the USD fall and lend some support.

The USD/JPY pair remained on the defensive through the early European session and was last seen trading with modest intraday losses, just below mid-113.00s.

The pair witnessed some selling on Wednesday and snapped two consecutive days of the winning streak that pushed spot prices to a one-week high, around the 113.75-80 region touched on Tuesday. Rising geopolitical tensions kept a lid on the recent optimistic move in the financial markets and benefitted the safe-haven Japanese yen.

The US recently announced that it would boycott the Winter Olympics in Beijing to protest China's alleged violations of human rights and actions against Muslims in Uyghur. Similarly, relations between the US and Russia took a turn for the worse after US President Joe Biden threatened to impose economic and other measures on Russia if it invades Ukraine.

Bearish traders further took cues from retreating US Treasury bond yields, which undermined the US dollar. The USD downside, however, remained cushioned, at least for the time being, amid the prospects for a faster policy tightening by the Fed. This, in turn, warrants some caution positioning for any meaningful decline for the USD/JPY pair.

Investors seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation. Hence, the market focus now shifts to the release of the US CPI report on Friday, which will influence the near-term USD price dynamics and provide a fresh directional impetus to the USD/JPY pair.

In the meantime, traders will take cues from the broader market risk sentiment to grab some short-term opportunities. Apart from this, the US bond yields will drive the USD demand and further provide some impetus to the USD/JPY pair amid absent relevant market moving economic releases.

Technical levels to watch