USD/JPY stalls intraday recovery from weekly low, fails just ahead of 138.00 mark

• USD/JPY bounced off the 137.00 mark, or a one-and-half-week low touched earlier this Friday.
• The narrowing US-Japan bond yield differential, the caution mood benefitted the safe-haven JPY.
• The divergent Fed-BoJ policy stance supports prospects for a further near-term appreciating move.

The USD/JPY pair attracted some dip-buying near the 137.00 mark, or over a one-week low touched this Friday and reversed a major part of the overnight decline. The intraday uptick, however, faltered just ahead of the 138.00 mark during the early European session.

The overnight sharp decline in the US Treasury bond yields resulted in the narrowing of the US-Japan rate differential, which benefitted the Japanese yen and acted as a headwind for the USD/JPY pair. The US economic data released on Thursday pointed to signs of a weakened trend in the economy. Adding to this, a White House statement said that President Joe Biden tested positive for COVID-19. This, in turn, drove some haven flows and exerted heavy downward pressure on the US bond yields.

Furthermore, growing fears about a possible recession continued weighing on investors' sentiment, which was evident from the prevalent caution mood around the equity markets. Apart from this, an upward revision of Japan's core CPI, to 1% from the prior release of 0.8%, offered some support to the safe-haven JPY and capped the USD/JPY pair. That said, a big divergence in the monetary policy stance adopted by the Bank of Japan and the Federal Reserve should help limit the downside.

In fact, the BoJ defied the global tightening trend and stuck to its ultra-easy policy settings on Thursday. The central bank reiterated its commitment to continue buying the Japanese Government Bonds (JGB) at an annual pace of around ¥80 trillion. In contrast, the Fed is all but set to deliver another 75 bps rate hike at its upcoming policy meeting on July 26-27. Moreover, investors seem convinced that the US central bank would need to tighten its policy at a faster pace to curb soaring inflation.

The fundamental backdrop supports prospects for the resumption of the prior strong upward trajectory. The lack of strong buying interest, however, could be seen as the first sign of possible bullish exhaustion amid growing recession fears. This makes it prudent to wait for sustained strength beyond the 138.25-138.30 region before positioning for any further near-term appreciating move. Traders now look forward to the release of the US PMI prints for a fresh impetus on the last day of the week.

Technical levels to watch