USD/JPY flirts with weekly low amid broad-based USD weakness, holds above mid-135.00s

• USD/JPY comes under some selling pressure on Wednesday amid broad-based USD weakness.
• The Fed-BoJ policy divergence could lend support to the pair and help limit any further losses.
• A positive risk tone could undermine the safe-haven JPY and further warrants caution for bears.

The USD/JPY pair attracts some sellers following an intraday uptick to the 136.45 area on Wednesday and moves further away from the YTD peak touched the previous day. Spot prices slide closer to the mid-136.00s during the first half of the European session, though any meaningful corrective decline seems elusive.

A sharp US DOllar retracement slide from a multi-week high turns out to be a key factor exerting some pressure on the USD/JPY pair. The downside, however, is likely to remain limited, at least for the time being, amid the divergent Bank of Japan(BoJ)-Fed monetary policy outlook. This, in turn, warrants some caution for aggressive bearish traders and positioning for deeper losses.

In fact, the incoming BoJ Governor Kazuo Ueda and Deputy Governor nominee Shinichi Uchida recently stressed the need to maintain the ultra-loose monetary policy to support the fragile domestic economy. In contrast, the US central bank is universally expected to stick to its hawkish stance for longer and continue hiking interest rates in the wake of stubbornly high inflation.

The prospects for further policy tightening by the Fed remain supportive of elevated US Treasury bond yields and favour the USD bulls. Apart from this, signs of stability in the equity markets, bolstered by the upbeat Chinese PMIs, could undermine demand for the safe-haven Japanese Yen (JPY). This, in turn, should lend some support to the USD/JPY pair and help limit the downside.

Hence, it will be prudent to wait for strong follow-through selling before confirming that the USD/JPY pair's recent appreciating move witnessed over the past month or so has run out of steam. Traders now look forward to the release of the US ISM Manufacturing PMI. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to the major.

Technical levels to watch