USD/JPY bounces-off key support near 108.50

• Benefits from rising Treasury yields.
• Sell the rallies?
• The US CPI report holds the key.

Amid a lack of liquidity, the USD/JPY pair is seen trading back and forth in a tight range, although manages to keep the downside restricted amid a risk-on rally in the European equities.

USD/JPY flirts with key support near 1.2550

The spot trades on the back foot so far this session, mainly driven by a softer tone seen around the US dollar across the board, as markets remain wary ahead of the US CPI data release, which is likely to set the path for further Fed rate hikes this year.

However, over the last hour, fresh bids appear to have emerged once again near the midpoint of the 108 barrier, allowing a tepid recovery in the major back towards 108.70 levels.

The latest upturn is on the back of a renewed risk-aversion wave that has gripped the markets, reflected by the rally in the European stocks, oil prices and Treasury yields, all of which are higher-yielding assets.

In the day ahead, it remains to be seen if the spot can sustain the recovery mode and regain the 109 handle amid thin volumes and a lack of fresh catalysts.

USD/JPY levels to watch

Omkar Godbole, Analyst at FXStreet, notes, “A positive close today, preferably above 109.00 would confirm the bull doji reversal and open doors for 110.48 (Feb. 2 high). A move to 110.48 or above looks likely on the back of strong US inflation numbers (this Friday). On the other hand, a big miss on the CPI may push USD/JPY lower towards 107.32 (September low), although it will likely turn out to be a bear trap as the decline in the treasury yields may help restore risk appetite in equities.”