USD/JPY drops to fresh 2-1/2-week lows, bears eyeing 110.00 mark

USD/JPY remained under some selling pressure on Thursday and retreated further from YTD tops.
COVID-19 jitters, risk-off mood benefitted the safe-haven JPY and contributed to the selling bias.
Hawkish Fed expectations acted as a tailwind for the USD and might help limit any further losses.
The USD/JPY pair witnessed some selling heading into the European session and dropped to fresh two-and-half-week lows, around the 110.20 region in the last hour.

Following the previous day’s directionless price moves, the USD/JPY pair met with some fresh supply on Thursday and extended its recent pullback from YTD tops, around the 111.65 region touched last week. Concerns about the economic fallout from the spread of the highly contagious Delta variant of the coronavirus continued weighing on investors’ sentiment. This was evident from a generally weaker tone around the equity markets, which continued benefitting the safe-haven Japanese yen and exerted some pressure on the USD/JPY pair.

Bearish traders further took cues from the recent sharp decline in the US Treasury bond yields, which, for now, kept a lid on any strong gains for the US dollar. That said, indications that the Fed is moving towards tapering its asset purchases earlier than previously anticipated should act as a tailwind for the greenback. The June FOMC meeting minutes revealed that policymakers agreed that they must be ready to act if inflation or other risks materialize, suggesting that QE tapering discussions could begin in the coming months.
This, in turn, should help limit any deeper losses for the USD/JPY pair and warrants some caution for aggressive bearish traders. Hence, it will be prudent to wait for a sustained break below the key 110.00 psychological mark before positioning for any further depreciating move. Market participants now look forward to the release of the US Initial Weekly Jobless Claims data. This, along with the broader market risk sentiment, the US bond yields and the USD price dynamics should produce some meaningful trading opportunities.