Title: USD/JPY sticks to modest recovery gains around 136.30-35 region, lacks follow-through

July 25, 2022 01:44 AM ET

By: AnalysisWatch

The USD/JPY pair attracted some buying near the 136.00 level during the Asian session on Monday, but struggled to capitalize on the move. The pair has since moved a few pips off the daily low and was last seen trading with only modest intraday gains in the 136.30-136.35 range.

The US dollar trended higher on the first day of the new week amid a slight increase in US government bond yields. This in turn provided some support to the USD/JPY pair, although a combination of factors kept bulls from placing aggressive bets and prevented a significant uptrend.

Market concerns about a global economic slowdown were further fueled by disappointing purchasing managers' index results from the Eurozone and the US on Friday. This continued to weigh on investor sentiment, supporting the Japanese yen, which is considered a safe haven, and pushing the USD/JPY pair lower.

The recent sharp decline in U.S. government bond yields was driven by the global flight to safety and expectations that a recession in the U.S. could force the Federal Reserve to taper its monetary tightening.

This narrowed the interest rate differential between the U.S. and Japan and further favored the JPY.

Meanwhile, the divergent policy stances of the Fed and the Bank of Japan should limit the downward trend of the USD/JPY pair. The Bank of Japan (BoJ) maintained its ultra-loose policy stance last week, committing to continue buying Japanese government bonds (JGBs) at an annual pace of around 80 trillion yen.

In the absence of relevant market-moving economic data, U.S. bond yields will play a key role in influencing USD price dynamics ahead of the key event. Apart from that, the general risk sentiment in the market could provide some trading momentum for the USD/JPY currency pair.