USD/JPY flirts with daily low, around 133.00 mark amid notable USD supply

• USD/JPY retreats from over a three-week high touched on Monday amid a modest USD weakness.
• A generally positive risk tone could undermine the safe-haven JPY and lend support to the major.
• The divergent Fed-BoJ policy outlook also warrants caution before placing aggressive bearish bets.

The USD/JPY pair comes under some selling pressure on Tuesday and erodes a part of the previous day's strong gains to the 133.85 region, or its highest level since mid-March. Spot prices drop to a fresh daily low, around the 133.00 round-figure mark during the early part of the European session and for now, seem to have snapped a three-day winning streak.

The US Dollar (USD) meets with some supply and stalls a four-day-old recovery trend from over a two-month low touched last week, which, in turn, is seen dragging the USD/JPY pair lower. The USD downtick, however, seems limited amid speculations that the Federal Reserve (Fed) may continue raising interest rates. In fact, the current market pricing indicates a greater chance of a 25 bps lift-off at the next FOMC monetary policy meeting in May and the bets were lifted by the mostly upbeat US employment details (NFP) released on Friday.

The prospects for further policy tightening by the Fed, meanwhile, puts a floor under the US Treasury bond yields, which should further act as a tailwind for the Greenback. Apart from this, the Bank of Japan's (BoJ) dovish near-term outlook, along with a generally positive tone around the equity markets, could undermine the safe-haven Japanese Yen (JPY) and help limit losses for the USD/JPY pair. It is worth recalling that the new BoJ Governor Kazuo Ueda said on Monday it was appropriate to maintain the ultra-loose stance as inflation has yet to hit 2% as a trend.

Traders might also refrain from placing aggressive directional bets and prefer to move to the sidelines ahead of this week's key data/event risks from the US - the release of consumer inflation figures and the FOMC meeting minutes on Wednesday. This, along with the US Retail Sales report on Friday, will play a key role in influencing the USD price dynamics and provide a fresh directional impetus to the USD/JPY pair. This makes it prudent to wait for strong follow-through selling before positioning for any meaningful slide in the absence of any relevant data on Tuesday.

Technical levels to watch