USD/JPY flirts with weekly low, hangs below 131.00 amid broad-based USD weakness

• USD/JPY remains on the defensive and is pressured by a combination of factors.
• Powell’s less hawkish stance, sliding US bond yields exert pressure on the USD.
• Hawkish BoJ expectations and a weaker risk tone benefit the safe-haven JPY.

The USD/JPY pair edges lower for the second straight day and remains on the defensive through the mid-European session on Wednesday. The pair is currently placed around the 130.80 region, just a few pips above the weekly low touched the previous day.

The US Dollar comes under some renewed selling pressure amid a fresh leg down in the US Treasury bond yields and acts as a headwind for the USD/JPY pair. Fed Chair Jerome Powell on Tuesday acknowledged that rates might need to move higher than expected if the economy remained strong, though struck a balanced tone on inflation. This, in turn, fueled speculations about an imminent pause in the Fed's policy-tightening cycle, which, in turn, is seen dragging the US bond yields lower.

The Japanese Yen (JPY), on the other hand, draws support from expectations that high inflation could invite a more hawkish stance from the Bank of Japan (BoJ) later this year. Apart from this, a weaker risk tone further benefits the safe-haven JPY and exerts downward pressure on the USD/JPY pair. The market sentiment remains fragile amid worries about economic headwinds stemming from rising borrowing costs, the COVID-19 outbreak in China and fears about worsening US-China relations.

The aforementioned fundamental backdrop suggests that the path of least resistance for the USD/JPY pair is to the downside. That said, the lack of follow-through selling warrants some caution for aggressive bearish traders in the absence of any relevant market-moving economic releases. That said, speeches by influential FOMC members could provide some impetus to the greenback. Apart from this, the broader risk sentiment should allow traders to grab short-term opportunities around the USD/JPY pair.

Technical levels to watch