USD/JPY retreats from multi-month tops, downside seems limited

• USD/JPY eased a bit from multi-month tops touched earlier this Wednesday.
• Retreating US bond yields weighed on the USD and exerted some pressure.
• The risk-on impulse should undermine the safe-haven JPY and limit losses.

The USD/JPY pair now seems to have entered a bullish consolidation phase and was seen oscillating in a range around the 111.50-40 region, just below 18-month tops touched earlier this Wednesday.

A combination of diverging forces failed to assist the pair to capitalize on a one-week-old strong bullish momentum and led to a subdued price action through the first half of the trading action. A modest pullback in the US Treasury bond yields kept the US dollar bulls on the defensive and acted as a headwind for the USD/JPY pair. However, a positive turnaround in the global risk sentiment undermined the safe-haven Japanese yen and helped limit any meaningful downside.

Apart from this, the recent widening of the nominal yield differential between the US and Japanese government bonds should cap the JPY. The US Treasury bond yields have been rallying since the end of last week amid prospects for an early policy tightening by the Fed. It is worth recalling that the Fed hinted that it will begin rolling back its massive pandemic-era stimulus as soon as November. Adding to this, the dot plot indicated policymakers' inclination to raise rates in 2022.

Conversely, the 10-year Japanese government bond yields remained near zero due to the Bank of Japan's yield curve control policy. The fundamental backdrop favours bullish traders and supports prospects for additional gains. Hence, the range-bound price move might still be categorized as a consolidation phase, especially after the recent upsurge of over 250 pips from the 109.10 region. This, in turn, suggests that any corrective pullback might be seen as a buying opportunity and remain limited

Market participants now look forward to the release of Pending Home Sales data from the US. The key focus, however, will be on Fed Chair Jerome Powell's remarks at the ECB Forum on Central Banking later during the North American session. This, along with the US bond yields, might influence the USD price dynamics and provide some impetus to the USD/JPY pair. Traders could further take cues from the broader market risk sentiment for some short-term trading opportunities.

Technical levels to watch