USD/JPY recovers a few pips from over a one-month low, finds some support near mid-130.00s

• USD/JPY comes under renewed selling on Monday and drops to its lowest level since February.
• The prevalent risk-off environment boosts the safe-haven JPY and weighs heavily on the major.
• A modest USD strength lends some support, though the fundamental backdrop favour bears.

The USD/JPY pair retreats over 200 pips from the daily swing high and drops to its lowest level since February 10 during the first half of the European session on Monday. Spot prices, however, manage to rebound a few pips in the last hour and currently trades around the 131.00 mark, still down over 0.60% for the day.

The prevalent risk-off environment - as reflected by an extended sell-off around the equity markets amid fears of a full-blown banking crisis - drives some haven flows towards the Japanese Yen (JPY) and weighs heavily on the USD/JPY pair. Despite the recent emergency liquidity measures and multi-billion-dollar lifelines for troubled US and European banks, market participants remain concerned about the contagion risk. This, along with looming recession risks, takes its toll on the global risk sentiment and forces investors to take refuge in traditional safe-haven assets.

That said, a modest US Dollar (USD) strength assists the USD/JPY pair to find some support ahead of the mid-130.00s and stall its sharp intraday downfall. The USD uptick, however, remains limited amid the ongoing slump in the US Treasury bond yields. The anti-risk flow, along with diminishing odds for a more aggressive policy tightening by the Fed, lead to a further steep fall in the US bond yields. This comes after the rate-sensitive 2-year US government bond last week recorded its biggest three-day fall since Black Monday in October 1987 and should cap the buck.

The aforementioned fundamental backdrop suggests that the path of least resistance for the USD/JPY pair is to the downside. That said, traders might refrain from placing fresh bearish bets and prefer to move to the sidelines ahead of the two-day FOMC meeting, starting this Tuesday. The Fed will announce its policy decision during the US session on Wednesday, which will play a key role in influencing the near-term USD price dynamics. This, in turn, should provide a fresh impetus to the USD/JPY pair and help investors to determine the next leg of a directional move.

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