USD/JPY trades with modest losses below 131.00, positive risk tone could help limit losses

• USD/JPY edges lower on Thursday amid the emergence of fresh selling around the USD.
• The uncertainty over the Fed’s rate-hike path weighs on the US bond yields and the buck.
• Expectations for a hawkish shift by the BoJ underpin the JPY and exert some pressure.
• A positive risk tone might cap gains for the safe-haven JPY and limit losses for the major.

The USD/JPY pair attracts some sellers following an early uptick to the 131.80-131.85 region and slide to the lower end of its daily range during the first half of the European session. The pair currently trades just below the 131.00 mark and remains well within the striking distance of the weekly low set on Wednesday.

The US Dollar retreats from a one-month top amid the uncertainty over the Fed's rate-hike path and is seen as a key factor exerting some downward pressure on the USD/JPY pair. Fed Chair Jerome Powell struck a balanced tone on inflation and reiterated on Tuesday that the process of disinflation was underway. This, in turn, fuels speculations that interest rates may not rise much further, which drags the US Treasury bond yields lower and weighs on the greenback.

Powell, however, acknowledged that rates might need to move higher than expected if the economy remains strong. A slew of FOMC members echoed Fed Chair Jerome Powell's hawkish view that additional rate hikes were likely warranted to control inflation. This, in turn, might hold back traders from placing bearish bets around the greenback. Apart from this, a generally positive tone around the equity futures - could undermine the safe-haven JPY and lend support to the USD/JPY pair.

That said, any meaningful recovery still seems elusive amid speculations that high inflation may invite a more hawkish stance from the Bank of Japan (BoJ) later this year. This, in turn, suggests that the path of least resistance for the USD/JPY pair is to the downside. That said, it will still be prudent to wait for some follow-through selling below the 130.50-130.40 strong horizontal resistance breakpoint, now turned support, before positioning for deeper losses.

Traders now look forward to the US economic docket, featuring the release of Weekly Initial Jobless Claims data later during the early North American session. This, along with the US bond yields, might influence the USD price dynamics and provide some impetus to the USD/JPY pair. Apart from this, traders will take cues from the broader risk sentiment to grab short-term opportunities ahead of the release of the Producer Price Index (PPI) from Japan on Friday.

Technical levels to watch