USD/JPY surrenders gains as US-Jap 10-yr yield spread narrows

USD/JPY has erased early Asian session gains and now trades flat on the day around 113.51 (23.6% Fib R of 108.80-111.49) as the spread between US 10-year yield and 10-year JGB yield narrowed to 2.227; the lowest since June 30. 

Dollar offered on glacial Fed

The American dollar was offered against most majors in the overnight trade after Yellen signaled the rates are close to neutral and talked about readiness to adjust policy if inflation remains weak. For the first time, Yellen explicitly said that the balance sheet runoff could begin later this year. However, markets conveniently ignored the hawkish comments. 

The yield spread, thus narrowed in favour of the Japanese Yen. The spot fell to a low of 112.92 after Yellen testimony before scoring an Asian session high of 113.53. The yield spread should continue to guide the action in the USD/JPY pair ahead of the US monthly PPI release and weekly jobless claims release.  Day 2 of Yellen testimony could influence markets as well.

USD/JPY Technical Levels

A break below 112.92 (previous day’s low) would open doors for a sell-off to 112.73 (July 4 low) and 112.13 (May 24 high). On the higher side, breach of resistance at 113.48 (200-DMA on 4-hour chart) could yield a re-test of 113.64 (5-DMA) and 114.00 (zero levels).