USD/JPY sticks to gains near mid-115.00s amid rising US bond yields, geopolitics in focus

• USD/JPY gained some follow-through traction for the second successive day on Tuesday.
• Disappointing Japanese data undermined the domestic currency and remained supportive.
• Rising US bond yields further inspired bulls, though subdued USD demand capped gains.

The USD/JPY pair maintained its bid tone heading into the European session and was last seen hovering near the top end of its intraday trading range, around mid-115.00s.

A combination of supporting factors assisted the USD/JPY pair to build on the overnight strong move up and gain some follow-through traction for the second successive day on Tuesday. Japan recorded a current account deficit of 1.1887 trillion yen in January, the largest since the start of 2014 amid a jump in oil import costs. This was seen as a key factor that undermined the Japanese yen and extended some support to the USD/JPY pair amid a fresh leg up in the US Treasury bond yields.

A further escalation in the Russia-Ukraine war continued acting as a tailwind for crude oil prices and has been fueling fears of a major inflationary shock for the global economy. The risk of stagflation increased further after reports indicated that the United States is considering banning Russian oil and natural gas imports in response to the country’s invasion of Ukraine. This, in turn, continued pushing the US bond yields higher, which inspired bulls and benefitted the USD/JPY pair.

On the other hand, the US dollar was seen consolidating its recent strong gains to the highest level since May 2020 and failed to provide an additional boost to the major. That said, the worsening situation in Ukraine should underpin the greenback's status as the global reserve currency. It is worth recalling that the third round of the Russia-Ukraine ceasefire talks ended without much progress and led to an extended sell-off in the equity markets.

The fundamental backdrop supports prospects for a further near-term appreciating move for the USD/JPY pair, though the lack of follow-through buying warrants some caution before placing aggressive bets. In the absence of any major market-moving economic releases from the US, the market focus will remain glued to the incoming headline surrounding the Russia-Ukraine saga. Apart from this, the US bond yields should produce some trading opportunities around the USD/JPY pair.

Technical levels to watch