- USD/JPY witnessed heavy selling on Tuesday amid a broad-based USD weakness.
- Hopes for diplomacy in Ukraine lifted the euro and weighed on the greenback.
- A combination of factors should lend support to the pair and limit deeper losses.
The heavily offered tone surrounding the greenback dragged the USD/JPY pair to a fresh daily low, around mid-122.00s during the early European session.
Following an early uptick to the 124.30 area, the USD/JPY pair witnessed some selling on Tuesday and extended the overnight sharp pullback from the 125.10 area or the highest level since August 2015. The latest optimism over the possibility of a diplomatic solution to end the war in Ukraine triggered aggressive short-covering around the shared currency. This, in turn, weighed on the US dollar and was seen as a key factor exerting downward pressure on the major.
Apart from this, the US dollar downtick lacked any obvious fundamental catalyst and is more likely to remain limited amid rising bets for a 50 bps Fed rate hike move at the next two meetings. Moreover, the divergence in the monetary policy stance adopted by the Fed and the Bank of Japan supports prospects for the emergence of dip-buying around the USD/JPY pair. The constructive outlook is reinforced by the risk-on impulse, which tends to undermine the safe-haven Japanese yen.
Russian Defense Ministry said that it would scale down military activity in Kyiv and Chernihiv in order to create conditions for dialogue. Adding to this, a Ukrainian negotiator noted that there have been enough developments to hold a meeting between Ukrainian President Volodymyr Zelenskyy and Russian President Vladimir Putin. The incoming geopolitical headlines boosted investors’ confidence, which was evident from the bullish trading sentiment around the equity markets.
This makes it prudent to wait for strong follow-through selling before confirming that the USD/JPY pair has topped out in the near term. Next on tap is the US economic docket, featuring the release of JOLTS Job Openings and the Conference Board’s Consumer Confidence Index. The focus, however, will remain on fresh geopolitical developments, which will influence the risk sentiment and drive demand for the safe-haven JPY, providing some impetus to the USD/JPY pair.
Technical levels to watch