August 2, 2022 03:02 AM ET
By: AnalysisWatch
The USD/JPY pair extends its decline for the fifth straight day and drops to a nearly two-month low on Tuesday. Spot prices, however, find some support ahead of the 100-day SMA and bounce back to the 131.00 mark during the early European session.
Despite a more dovish stance adopted by the Bank of Japan, the recent yield compression globally makes the Japanese yen more attractive. It is worth recalling that the Federal Reserve last week hinted that it could slow the pace of the rate hike campaign at some point. Furthermore, the Advance US GDP report released last Thursday confirmed a technical recession and fueled speculations that the Fed would not hike rates as aggressively as previously estimated. This, in turn, drags the yield in the benchmark 10-year US government bond to its lowest level since April. Conversely, the Japanese government bond yields aren't moving because of the BoJ's yield curve control policy.
Apart from this, a generally weaker risk tone is also driving some safe-haven flows towards the JPY, which turns out to be a key factor exerting downward pressure on the USD/JPY pair. The market sentiment remains fragile amid growing worries about a global economic downturn. Apart from this, jitters about the impact of an impending visit to Taiwan by US House of Representatives Speaker Nancy Pelosi further temper investors' appetite for riskier assets. That said, a modest US dollar bounce from its lowest level since July 5 offers some support to the major. The fundamental backdrop, however, suggests that any meaningful recovery attempt runs the risk of fizzling out rather quickly.
Hence, a strong follow-through buying is needed to confirm that the USD/JPY pair has formed a near-term bottom. Conversely, bearish traders might now wait for a sustained break below the 100-day SMA support, currently around the 130.20 region, before positioning for any further depreciating move.
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