- USD/JPY receives some selling on Monday and breaks two-day winning streak.
- Risk aversion benefits the safe haven JPY and puts some pressure on the pair.
- Optimistic Fed expectations act as a tailwind for the USD and could help limit the pair’s decline.
USD/JPY has extended its steady intraday decline to new daily lows around 109.75-70 at the start of the European session on Monday.
As we enter the first day of a new week, the pair has been met with fresh selling and has given back a significant portion of Friday’s gains. This is the first day of negative movement in the previous three days, which is the result of risk aversion in the markets, which usually favors the safe-haven Japanese yen.
Investors are concerned about the rapid spread of the Delta variant and a slowdown in the global economy. As a result, risk sentiment has been affected, along with the looming catastrophe at Evergrande in China. Additionally, politics adds additional uncertainty ahead of this week’s federal elections in Canada and Germany.
As a result of the flight to safety, US Treasury yields have dropped sharply, another factor contributing to the intraday decline. Even so, strong continuation buying around the US dollar, amid expectations of an imminent Fed announcement, may limit the decline in USD/JPY.
While the US inflation rate is easing, recent macroeconomic data indicate the continuation of the economic recovery. Optimism has been fueling speculation that the Fed will begin reversing its stimulus sooner rather than later, which has acted as a tailwind for the USD.
Market focus remains on the FOMC monetary policy meeting, which begins on Tuesday. USD/JPY will be influenced by clues on the timing of the tapering of bond purchases, which will play a key role in shaping near-term USD price dynamics and provide fresh directional momentum.
In the meantime, traders are expected to examine the broader risk sentiment on the market and US bond yields amid the absence of important economic releases on Monday.