USD/JPY drops to sub-133.00 levels on softer US CPI, lacks follow-through

• USD/JPY retreats sharply from a four-week high touched earlier this Wednesday.
• The softer US CPI-inspired broad-based USD weakness is seen exerting pressure.
• The risk-on mood, the BoJ’s dovish outlook undermines the JPY and lend support.

The USD/JPY pair comes under heavy selling pressure during the early North American session and retreats further from a four-week high touched this Wednesday. The pair drops to a fresh daily low in reaction to softer US consumer inflation figures and is currently trading around the 133.00 mark, down nearly 0.50% for the day.

The US Dollar (USD) weakens across the board and dives closer to a two-month low touched last week following the release of the crucial US CPI report, which, in turn, is seen exerting downward pressure on the USD/JPY pair. In fact, the US Bureau of Labor Statistics reported that the headline CPI rose by 0.1% in March as compared to the 0.4% recorded in the previous month and the 0.3% anticipated.

Furthermore, the yearly rate decelerated from 6% in February to 5.0% during the reported month and largely overshadowed the mostly inline core CPI, which excludes food and energy prices. Nevertheless, the data reinforce market expectations that the Federal Reserve (Fed) is nearing the end of its rate-hiking cycle, which triggers a steep decline in the US Treasury bond yields and weighs on the buck.

That said, a combination of factors might undermine the Japanese Yen (JPY) and limit losses for the USD/JPY pair, at least for the time being. The prospects for an imminent Fed rate-hike pause boost investors' confidence, which is evident from a sharp spike in the US equity futures. Apart from this, the Bank of Japan's (BoJ) dovish near-term outlook should act as a headwind for the JPY.

Traders might also refrain from placing aggressive bets and prefer to move to the sidelines ahead of the FOMC meeting minutes, due for release later during the US session. The Fed minutes will provide insight into how policymakers evaluated the need for higher rates despite the turmoil in the banking sector. This should help investors to determine the near-term trajectory for the Greenback.

The aforementioned mixed fundamental backdrop makes it prudent to wait for strong follow-through selling before confirming that the USD/JPY pair’s one-week-old uptrend has run its course.

Technical levels to watch