USD/JPY has pared intraday losses but is still in the red below 122.00 mark

A combination a number of factors drove USD/JPY lower on Wednesday for the second consecutive day.

USD/JPY has pared intraday losses but is still in the red below 122.00 mark

The upside seems to be cushioned by the divergence between policy outlooks of the Fed and BoJ.

Investors are now watching the US ADP report, final Q4 GDP print and other data for short-term trading inspiration.

The USD/JPY currency pair recovered nearly 60 pips from its multi-day low. It was last seen trading just under the 122.00 mark. However, it was still nearly 1% lower for the day.

On Wednesday, the pair saw heavy selling and fell further from its highest level since August 2015. It was at the 125.10 mark on the first day. The USD/JPY pair fell due to speculation that Japanese officials were uneasy and would react to the yen's weakness.

A turnaround in risk sentiment also drove some haven flow towards the JPY, which further impacted the USD/JPY exchange rate. Recent optimism about a diplomatic solution to the Russia-Ukraine war ended quickly. This was evident in a new leg down on the equity markets. This was a benefit to traditional safe-haven assets.

The US dollar, on the other hand, added to its losses the previous day and fell to a more than one-week low. The USD/JPY exchange rate fell to an intraday low of 121.30. However, the US Treasury bond yields rose, supported by Fed expectations of hawkish behavior, to limit further losses.

Markets believe that the Fed will adopt a more aggressive policy to combat high inflation. They have already priced in a 50-bps rate increase at the Fed's next two meetings. The Bank of Japan will likely maintain its ultra-loose policy for a long time. This supports the possibility of dip-buying in the USD/JPY currency pair.

The downfall could still be considered a corrective pullback. However, it is important to exercise caution before declaring that the USD/JPY exchange rate has bottomed. Market participants are now looking forward to the US economic docket. This will include the release of ADP's report on private sector employment and the final Q4 print later in the North American session.

These, together with US bond yields might impact the USD price dynamics and give some impetus for the USD/JPY pairing. Traders will also be watching for developments in the Russia-Ukraine story. Market risk sentiment and the demand for JPY, a safe-haven currency, would be influenced by the new geopolitical headlines.