USD/JPY flirts with daily low, still comfortable above 135.00 mark ahead of US data/Powell

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  • USD/JPY extended the overnight pullback from a 24-year high and edged lower for the second straight day.
  • Speculations that authorities could intervene, along with recession fears underpinned the safe-haven JPY.
  • Modest USD strength, the Fed-BoJ policy divergence support prospects for the emergence of some dip-buying.

The USD/JPY pair witnessed some selling for the second straight day on Thursday and moved further away from a 24-year high, around the 136.70 region touched the previous day. The pair maintained its offered tone through the mid-European session and was last seen trading just below mid-135.00s, down over 0.60% for the day.

Traders turned cautious and opted to lighten their bullish bets around the USD/JPY pair amid speculations that any further depreciation of the Japanese yen might force some form of practical intervention. Apart from this, the worsening global economic outlook drove haven flows towards the JPY and exerted downward pressure on the major.

Investors remain sceptic that major central banks could hike interest rates to curb soaring inflation without affecting economic growth. Adding to this, the disappointing release of the flash Eurozone PMI prints for June further fueled worries about a possible recession and boosted demand for traditional safe-haven assets.

Bearish traders further took cues from declining US Treasury bond yields, though the emergence of fresh US dollar buying helped limit deeper losses for the USD/JPY pair, at least for now. The USD drew support from firming expectations that the Fed would stick to its aggressive policy tightening path to combat stubbornly high inflation.

In fact, the markets have been pricing in another 75 bps rate hike move at the upcoming FOMC policy meeting in July. The bets were reaffirmed by Fed Chair Jerome Powell’s remarks on Wednesday, saying that the ongoing rate increases will be appropriate. In contrast, the Bank of Japan remains committed to keeping interest rates very low.

It is worth recalling that the BoJ last week decided to maintain the massive stimulus programme and vowed to defend the 0.25% cap for the 10-year JGB yield to support a still-fragile economy. This, along with a turnaround in the global risk sentiment, assisted the USD/JPY pair to find support ahead of the 135.00 psychological mark.

The fundamental backdrop supports prospects for the emergence of some dip-buying around the USD/JPY pair. Hence, the negative move witnessed over the past two trading sessions might still be categorized as a corrective pullback and is more likely to be bought into, warranting some caution for aggressive bearish traders.

Next on tap is the US economic docket, featuring the release of the usual Weekly Jobless Claims data and the flash PMI prints for June. Traders will also take cues from Fed Chair Jerome Powell’s second day of testimony. Apart from this, the US bond yields, the USD price dynamics and the broader risk sentiment might provide some impetus to the USD/JPY pair.

Technical levels to watch