USD/JPY remains depressed amid softer risk tone, downside seems cushioned ahead of US CPI

• USD/JPY witnessed fresh selling on Friday amid reviving demand for the safe-haven JPY.
• The Fed-BoJ policy divergence should cap the JPY and lend some support to the major.
• Investors look forward to the US consumer inflation figures for a fresh directional impetus.

The USD/JPY pair came under some renewed selling pressure on Friday and dropped back closer to the overnight swing low during the early European session. The pair was last seen trading just below mid-133.00s, down 0.65% for the day.

The market sentiment remains fragile amid concerns that a more aggressive move by major central banks to normalize monetary policy to curb inflation would pose challenges to global economic growth. This was evident from a generally weaker tone around the equity markets, which drove some haven flows towards the Japanese yen. This, along with extremely overbought conditions, prompted traders to take some profits off the table following the recent strong bullish run.

The downside, however, remains cushioned amid a big divergence in the monetary policy stance adopted by the Bank of Japan (dovish) and the Fed (hawkish). In fact, BoJ Governor Haruhiko Kuroda reiterated on Wednesday that the central bank must continue its support for the economic activity by keeping its existing ultra-loose policy settings. Adding to this, the BoJ has promised to conduct unlimited bond purchase operations to defend its near-zero target for 10-year yields.

In contrast, the yield on the benchmark 10-year US government bond held steady above the 3.0% threshold amid worries about the persistent rise in inflationary pressures. Investors remain concerned that the global supply chain disruption caused by the Russia-Ukraine war would push consumer prices even higher. This might force the Fed to tighten its monetary policy at a faster pace, which remained supportive of elevated US bond yields and acted as a tailwind for the US dollar.

Hence, the market focus will remain glued to the latest US consumer inflation figures, due for release later during the early North American session. The crucial US CPI report would play a key role in influencing the Fed's policy tightening path and the near-term USD price dynamics. This, in turn, should provide a fresh directional impetus to the USD/JPY pair. Nevertheless, the fundamental backdrop favours bullish traders and supports prospects for the emergence of some dip-buying.

Technical levels to watch