USD/JPY rebounds above 109.70 on the back of rising US T-bond yields

• USD/JPY is staging a recovery following Thursday's sharp drop.
• 10-year US Treasury bond yield is up more than 3%.
• US Dollar Index stays in the positive territory above 92.20 ahead of PPI data.

The USD/JPY pair dropped to its lowest level in more than two weeks at 109.00 on Thursday but managed to stage a recovery on Friday. As of writing, the pair was up 0.45% on a daily basis at 109.70.

The sharp drop witnessed in the US Treasury bond yields on Thursday weighed heavily on the greenback and caused USD/JPY to extend its weekly slide. The benchmark 10-year US T-bond yield lost more than 3% and the US Dollar Index fell below 92.00 for the first time since March 23.

In the absence of significant fundamental drivers the 10-year US T-bond yield, which was last seen rising 3.4%, is making a decisive upward correction and helping USD/JPY erase its losses.

Later in the session, the Producer Price Index (PPI) will be the only data featured in the US economic docket and is unlikely to trigger a significant market reaction.

USD/JPY near-term outlook

Karen Jones, Team Head FICC Technical Analysis Research at Commerzbank, thinks that USD/JPY could suffer additional losses in the near term if it stays below the 20-day SMA at 109.51.

“We would allow for a slide to initially the March 10 and 23 lows at 108.41/34 and there is scope for the 38.2% retracement at 107.77," Jones noted. “Above 110.97 lies the 111.13/38 October 2018 low and mid-February 2019 high.”

Additional levels to watch for