USD/JPY pauses on the way to 114.00 amid sluggish yields ahead of Fed

• USD/JPY grinds higher around weekly top, extending two-day advances.
• Yields fail to extend the latest rebound, S&P 500 Futures print mild gains.
• Japan train bookings rally over 80% for year-end holidays, PM Kishida, BOJ Governor Kuroda struggle to placate market fears.
• Vaccine optimism joins stimulus hopes but Omicron fears, Fed-linked cautious stay on the table.

USD/JPY takes a U-turn from intraday high to challenge the previous two-day uptrend, down 0.03% on a day around 113.70 during the initial Tokyo trading on Wednesday.

The risk barometer pair’s latest weakness could be linked to the Omicron fears and the market’s anxiety ahead of today’s US Federal Reserve (Fed) monetary policy meeting.

Although a leap in Japan’s train reservations for holidays hints at receding virus fear, the fears of a flood in the UK’s Omicron-linked hospitalizations and recently rising covid variant cases in the Asia-Pacific portray the COVID-19 woes.

Elsewhere, Japan PM Fumio Kishida accepts mistakes in the Construction Orders data but turns down any impact of the mistakes on GDP for FY 2020 and 2021. On the other hand, Bank of Japan (BOJ) Governor Haruhiko Kuroda said, per Reuters, that Inflation may approach 2% through 'various channels'. Earlier in Asia BOJ shows readiness to purchase two trillion yen of the bonds via repurchase auctions.

It’s worth noting that a drop in the US inflation expectations, as measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, to an 11-week low contradicts record high Producer Price Index (PPI) for November. The same propel the market’s anxiety ahead of the key Fed meeting. The policymakers are expected to fasten the tapering and hint at rate hikes but the Omicron woes challenge the hawks.

Read: Fed Preview: Dollar hinges on 2022 rate hike dots, guide to trading the grand finale of 2021

Alternatively, the US Senate approved a bill to raise the debt ceiling by $2.5 trillion whereas President Joe Biden also sounds hopeful of getting his Build Back Better (BBB) plan through the House in 2021.

Amid these plays, the US 10-year Treasury yields fade the previous day’s rebound from weekly low whereas the S&P 500 Futures and Japan’s Nikkei 225 prints mild gains by the press time.

Moving on, cautious sentiment ahead of the Fed’s verdict may keep USD/JPY prices ground but hopes of the hawkish outcome favor buyers.

Technical analysis

While the 21-DMA level near 113.85 guards short-term USD/JPY advances, multiple hurdles surrounding 114.45-50 becomes the key for buyers to watch. Meanwhile, the pair’s downside remains elusive until breaking an ascending support line, previous resistance, from March around 112.55.