• USD/JPY witnessed some intraday selling amid a turnaround in the risk sentiment.
• Modest pickup in the USD demand extended support and helped limit the downside.
• The focus remains glued to the Russia-Ukraine ceasefire talks and the US CPI report.

The USD/JPY pair surrendered a major part of its intraday gains to a one-month peak and retreated to the 115.85 area during the first half of the European session.

The early optimism over the possibility of a diplomatic resolution to end the war in Ukraine fizzled out rather quickly amid reports that Russian troops have taken over parts of Mariupol. The turnaround in the risk sentiment was evident from a steep decline in the equity markets. This, in turn, drove some haven flows towards the Japanese yen and exerted downward pressure on the USD/JPY pair.

The sharp market reaction suggests that investors remain concerned about the risk of a further escalation in tensions between Russia and the West. It is worth recalling that US President Joe Biden on Tuesday imposed an immediate ban on Russian oil and other energy imports. Britain matched the move and said that it would phase out the import of Russian oil by the end of 2022.

Separately, the European Union (EU) also announced new sanctions against Russian individuals and Belarus banks. The Russian foreign ministry said that the response to the Western sanctions will be sensitive and precise. Adding to this, the UK Parliamentary Under-Secretary of State for the Armed Forces - James Stephen Heappey - warned of NATO intervention if Russia use chemical weapons.

That said, the emergence of some US dollar buying extended some support to the USD/JPY pair and helped limit the downside, at least for the time being. Investors also seemed reluctant and preferred to wait for the incoming headlines from the Russia-Ukraine ceasefire talks in Turkey. Apart from this, investors will take cues from the release of the latest US consumer inflation figures.

Technical levels to watch