USD/JPY edges lower toward 106 after US yield curve inversion

• US 10-year T-bond yield falls below 2-year T-bond yield on Wednesday.
• S&P 500 Futures erases nearly 1% ahead of Wall Street opening.
• Dollar weakens slightly, US Dollar Index edges lower below 97.70.

The yield curves of the 10-year and 2-year Treasury bonds inverted for the first time since 2007 earlier today and caused markets to turn risk-averse. After spending the first half of the day moving in a tight range near 106.50, the USD/JPY pair lost its traction and touched a fresh session low of 106.12 after this development. At the moment, the pair is down 0.5% on the day at 106.20.

At the moment, the 10-year T-bond yield is down 3.27% on the day at 1.625, sitting slightly below 1.628%, the yield on the 2-year reference. In addition to the fact that this is seen as a strong sign of an upcoming recession, markets are also keeping eye on the Federal Reserve's rate cut expectations.

Eyes on market sentiment

Although yesterday's headlines surrounding the US-China trade conflict showed that markets were pricing virtually a no-chance of a 50 basis points rate cut in September, the probability is now around 15% according to the CME Group's FedWatch Tool. Meanwhile, the US Dollar Index is now losing 0.12% on the day at 97.70, staying slightly above the session low that it set at 97.67 in the last hour.

In the second half of the day, investors will be paying close attention to Wall Street's performance to understand the impact of this development on the market sentiment. At the moment, the S&P 500 Futures is down nearly 1% on the day, suggesting that major equity indexes in the US are likely to start the day deep in the negative territory.

Technical levels to watch for