USD/JPY recovers few pips from daily low, finds some support near 125.00 mark

• USD/JPY witnessed some selling on Thursday and retreated further from the two-decade high.
• The ongoing USD corrective pullback was seen as a key factor that exerted downward pressure.
• The Fed-BoJ policy divergence, the risk-on impulse undermined the JPY and helped limit losses.

The USD/JPY pair managed to recover around 30 pips from the daily low and was last seen trading with only modest losses, around the 125.40 region heading into the European session.

The pair edged lower during the early part of trading on Thursday and moved away from its highest level since 2002, around the 126.30 region touched the previous day. The US dollar prolonged its profit-taking slide from a near two-year high, which, in turn, exerted some downward pressure on the USD/JPY pair.

The US consumer inflation figures released on Tuesday were not as bad as feared by the markets and forced the US Treasury bond yields to pause their recent rally to the multi-year peak. This was seen as a key factor that prompted traders to unwind some of their USD bullish bets and acted as a headwind for the USD/JPY pair.

That said, a combination of factors helped limit losses and assisted spot prices to find some support near the 125.00 psychological mark. The risk-on impulse - as depicted by a generally positive tone around the equity markets - undermined demand for traditional safe-haven assets and capped gains for the Japanese yen.

Apart from this, the widening policy divergence between the Bank of Japan and the Fed held back traders from placing aggressive bearish bets around the USD/JPY pair. The BoJ Governor Haruhiko Kuroda on Tuesday reiterated to maintain the current powerful easing to support an economy that is yet to recover to pre-pandemic levels.

On the other hand, the Fed is expected to tighten its monetary policy at a faster pace to curb soaring inflation. The bets were reaffirmed by the US Producer Price Inflation, which indicated that there are pipeline costs that could put upward pressure on the already high inflation. This, in turn, should lend support to the buck.

The fundamental backdrop seems tilted firmly in favour of bullish traders and supports prospects for an extension of the USD/JPY pair's recent bullish run witnessed over the past one month or so. That said, overbought oscillators warrant caution amid fading hopes for a diplomatic solution to end the war in Ukraine.

Market participants now look forward to the US economic docket - featuring monthly Retail Sales, the usual Weekly Initial Jobless Claims and Prelim Michigan Consumer Sentiment Index. This, along with the US bond yields will influence the USD and produce dynamics and produce some trading opportunities around the USD/JPY pair.

Technical levels to watch