USD/JPY remains depressed below mid-139.00s, downside seems limited ahead of US CPI

• USD/JPY meets with some supply on Tuesday and snaps a two-day winning streak.
• Sliding US bond yields weighs on the USD and exerts some pressure on the major.
• The Fed-BoJ policy divergence to help limit losses ahead of the key US CPI report.

The USD/JPY pair struggles to capitalize on its gains registered over the past two days and comes under some selling pressure during the Asian session on Tuesday. The pair currently trades just below mid-139.00s, down nearly 0.15% for the day and well within a familiar trading range held over the past two weeks or so.

Firming expectations that the Federal Reserve (Fed) will more likely skip hiking interest rates in June drags the US Dollar (USD) to its lowest level since May 22 and turns out to be a key factor dragging the USD/JPY pair lower. It is worth recalling that a slew of influential Fed officials recently lifted bets for an imminent pause in the US central bank's year-long policy tightening cycle. This, in turn, triggers a fresh leg down in the US Treasury bond yields and continues to weigh on the Greenback.

Furthermore, the prospect of Japanese authorities intervening in the markets to support the domestic currency, along with worries about a global economic slowdown, underpins the safe-haven Japanese Yen (JPY). This is seen as another factor that contributes to the offered tone surrounding the USD/JPY pair. That said, expectations that the BoJ will stick to its dovish stance might keep a lid on any meaningful upside for the JPY and help limit losses for the major, at least for the time being.

In fact, BoJ Deputy Governor Masazumi Wakatabe said on Monday that there are overwhelming cases for the continuation of the ultra-easy monetary policy measures. In contrast, Fed funds futures indicate that the markets have been pricing in the possibility of another 25 bps lift-off at the July FOMC meeting. The bets were lifted by surprise rate hikes by the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) last week, which suggested that the fight against inflation is not over yet.

Hence, the focus will remain glued to the release of the latest consumer inflation figures from the US, due later during the early North American session. A stronger US CPI print will support prospects for further policy tightening by the Fed, which, in turn, should provide a modest lift to the buck and the USD/JPY pair. The immediate reaction, however, is likely to remain limited ahead of the key central bank event risks - the FOMC decision on Wednesday and the BoJ meeting on Friday.

Technical levels to watch