• USD/JPY is at fresh eight-month lows, 127.00 appears at risk.
• Japanese yen rallies on potential hawkish BoJ action, as yields policy stutters.
• US holiday-induced thin trading exaggerates moves in the USD/JPY pair.

USD/JPY is holding the latest downtick below 127.50, having renewed eight-month lows at 127.24. Bears remain in control at the start of the week on Monday, as the Japanese Yen extends its bullish momentum.

Hopes that the Bank of Japan (BoJ) could surprise markets with a hawkish pivot at its policy meeting this week are underpinning the sentiment around the Yen, especially after the Japanese central bank failed to defend its yield curve control (YCC) policy for the second day in a row. The 10-year JGB yield rose 1 basis point to 0.510%, topping the 0.5% ceiling of the BOJ's policy band.

“The BOJ bought roughly 10 trillion Yen ($78 billion) in JGBs over the past two days, with a 5 trillion Yen purchase on Friday topping the high it had just set Thursday and is preparing to purchase more Japanese government bonds on Monday,” FXStreet’s Analyst Ross Burland noted, citing the Nikkei Asian Review.

Meanwhile, the renewed sell-off in the USD/JPY pair is dragging the US Dollar broadly lower, with the US Dollar Index down 0.36% on the day at 101.84, at the press time. The US market is closed on Monday, in observance of Martin Luther King Jr. Day, and therefore low liquidity is exaggerating the moves in the major.

The key event risk for the spot this week remains the BoJ monetary policy announcements and the US Retail Sales data. In a surprise move last month, the BoJ widened the band for the 10-year bond yield to 0.5% up and down from its 0% target.

USD/JPY: Technical levels to watch