USD/JPY struggles for a firm direction, holds steady above mid-113.00s

• USD/JPY extended its sideways consolidative price moves heading into the European session.
• A cautious market mood underpinned the safe-haven JPY and acted as a headwind for the pair.
• Hawkish Fed expectations, rising US bond yields benefitted the USD and extended some support.

The USD/JPY pair lacked any firm directional bias and remained confined in a narrow trading band, just above mid-113.00s heading into the European session.

A combination of diverging forces failed to provide any meaningful impetus to the USD/JPY pair and led to a subdued/range-bound price move through the early part of the trading action on Thursday. Despite easing fears about the economic fallout from the new Omicron variant of the coronavirus, escalating geopolitical tensions kept a lid on the recent optimism. This was evident from a softer tone around the equity markets, which benefitted the safe-haven Japanese yen and acted as a headwind for the major.

Investors turned cautious after US President Joe Biden on Tuesday threatened to impose strong economic and other measures on Russia if it invades Ukraine. This comes after the US recently announced that it will not send an official delegation to the 2022 Winter Olympics in Beijing. The move was meant to protest against China's alleged violations of human rights and actions against Muslims in Uyghur. The developments overshadowed the news that the third dose of Pfizer's COVID-19 vaccine neutralized the Omicron variant in lab tests.

That said, the downside remains cushioned amid a modest pickup in the US dollar demand, bolstered by the prospects for a faster policy tightening by the Fed. The markets seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation. This, along with a further recovery in the US Treasury bond yields, underpinned the greenback and extended some support to the USD/JPY pair. Investors, however, preferred to wait on the sidelines ahead of Friday's release of the US CPI report.

The latest US consumer inflation figures would influence the Fed's decision to taper its stimulus at a faster pace and set the stage for an interest rate hike next year. It is worth mentioning that the money markets indicate the possibility for an eventual liftoff in May 2022. Hence, the data will play a key role in driving the USD demand in the near term and help determine the next leg of a directional move for the USD/JPY pair.

Technical levels to watch