USD/JPY Forecast: Corrective pullback could be bought into and remain limited

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  • USD/JPY edged lower for the third straight day and retreated further from a 24-year high.
  • The narrowing of the US-Japanese yield differential benefitted the JPY and exerted pressure.
  • A turnaround in the risk sentiment could cap gains for the JPY and help limit the downside.

The USD/JPY pair remained depressed for the third straight day on Friday and languished near the weekly low touched the previous day. Following the recent strong runup to a 24-year high, traders turned cautious 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.

The market sentiment remains fragile amid concerns that a more aggressive move by major central banks to curb soaring inflation would pose challenges to the global economic recovery. Adding to this, the disappointing release of the flash Eurozone PMIs on Thursday further fueled worries about a possible recession and boosted demand for traditional safe-haven assets. Bearish traders further took cues from the narrowing gap between the US-Japanese bond yields.

Worries that the Fed’s commitment to tame red hot inflation would result in slowing economic growth sent the yield on the benchmark 10-year US government bond to an almost two-week low. This, in turn, acted as a headwind for the US dollar and further contributed to the offered tone surrounding the USD/JPY pair. Spot prices seemed unaffected by the release of the Japanese inflation data, which held steady at 2.5% YoY as against a rise to 2.9% anticipated.

That said, a goodish rebound in the equity markets kept a lid on any meaningful gains for the safe-haven JPY and helped limit deeper losses for the USD/JPY pair, at least for the time being. Market participants now look forward to a scheduled speech by St. Louis Fed President James Bullard. Apart from this, the US economic docket, featuring the release of the revised Michigan Consumer Sentiment Index and New Home Sales data might influence the USD.

Traders will further take cues from the broader market risk sentiment to grab short-term opportunities around the USD/JPY pair. Nevertheless, the bid policy divergence adopted by the Bank of Japan (dovish) and expectations that the Fed would tighten its monetary policy at a faster pace to combat stubbornly high inflation supports favours bullish traders. Hence, any subsequent downfall might still be seen as a buying opportunity and is more likely to remain limited.

Technical outlook

From a technical perspective, spot prices, so far, have managed to defend the 134.30-134.20 horizontal support. This is closely followed by the 134.00 round-figure mark, which if broken might prompt some technical selling. The USD/JPY pair might then accelerate the fall towards the 133.00 mark with some intermediate support near the 133.60-133.50 region. The corrective fall could further get extended towards the 132.20 zone en-route the 132.00 round figure and last week’s swing low, around mid-131.00s.

On the flip side, momentum back above the 135.00 psychological mark has the potential to lift the USD/JPY pair back towards the 135.45-135.50 region. Some follow-through buying would negate any near-term negative bias and allow bulls to aim back to reclaim the 136.00 mark. The next relevant hurdle is pegged near the 136.70 region, or over a two-decade high touched earlier this week, ahead of the 137.00 mark and a two-week-old ascending trend-line, currently around the 137.35 zone.