USD/JPY pares intraday gains, retreats back below mid-115.00s amid softer USD

• A combination of supporting factors assisted USD/JPY to regain some positive traction on Monday.
• A positive risk tone undermined the safe-haven JPY and extended support amid rising US bond yields.
• The onset of some USD profit-taking held back bulls from placing fresh bets and capped the upside.

The USD/JPY pair retreated a few pips from the Asian session high and was last seen trading just below mid-115.00s, still up nearly 0.20% for the day.

Following Friday's pullback from the 115.70 area, or a three-week high, the USD/JPY pair attracted fresh buying on the first day of a new week and was supported by a combination of factors. A recovery in the global risk sentiment – as depicted by a generally positive tone around the equity markets – undermined the safe-haven Japanese yen. Bulls further took cues from an uptick in the US Treasury bond yields, bolstered by a more hawkish tone coming out of the FOMC meeting last week.

It is worth recalling that the Fed indicated last Wednesday that it could raise interest rates at a faster pace than anticipated to contain surging inflation. The market was quick to react and started pricing in the possibility of five quarter-point rate hikes by the end of 2022 and that the first hike in March could be 50 bps. This resulted in the widening of the 2-year US-Japanese government bond yield spread to its highest since late February 2020, which further weighed on the JPY.

That said, the rise in the benchmark 10-year JGB to the highest level since January 2016 helped limit any deeper losses for the domestic currency. Apart from this, modest US dollar profit-taking held back traders from placing aggressive bets and kept a lid on any further gains for the USD/JPY pair, at least for the time being. This makes it prudent to wait for a strong follow-through buying before positioning for an extension of the recent strong rally witnessed over the past one week or so.

Market participants now look forward to the US economic docket, highlighting the release of Chicago PMI later during the early North American session. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to the USD/JPY pair. Apart from this, traders will further take cues from the broader market risk sentiment to grab some short-term opportunities around the major.

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