USD/JPY trades with mild negative bias around 140.00, downside seems limited ahead of Fed

• USD/JPY ticks lower during the Asian session on Wednesday, albeit lacks follow-through.
• A softer risk tone benefits the safe-haven JPY and is seen acting as a headwind for the pair.
• The downside seems limited as the market focus remains glued to the key FOMC decision.

The USD/JPY pair is seen oscillating in a narrow trading band during the Asian session on Wednesday and consolidating its gains registered over the past three days. The pair is currently placed just above the 140.00 psychological mark as traders now seem to have moved to the sidelines and keenly await the outcome of the highly-anticipated FOMC policy meeting.

The Federal Reserve (Fed) is scheduled to announce its decision at 18:00 GMT later today and is widely expected to pause its year-long rate-hiking cycle. The bets were cemented by the latest US consumer inflation figures released on Tuesday, which showed that the Consumer Price Index (CPI) barely rose in May and the annual increase was the smallest in more than two years. In fact, the US Labor Department reported that the headline CPI edged higher by 0.1% during the reported month, following a 0.4% rise in April, marking the 11-straight month of cooling price pressures.

Over the 12 months through May, the CPI decelerated from 4.9% in April to 4.0% - the smallest year-on-year increase since March 2021. This, however, is still twice the Fed's 2% target and could allow the Fed to stick to its hawkish stance. Apart from this, the fact that markets have been pricing in a greater chance of another 25 bps lift-off at the July FOMC meeting led to the overnight sharp spike in the US Treasury bond yields and is seen offering some support to the US Dollar (USD). This, in turn, should act as a tailwind for the USD/JPY pair and help limit any meaningful downfall.

Meanwhile, the market anxiety heading into the key central bank event risk is evident from a generally softer risk tone, which is seen benefitting the safe-haven Japanese Yen (JPY) and exerting some pressure on the major. However, expectations that the Bank of Japan (BoJ) will stick to its dovish stance to support the economy and ensure that the recent positive signs are sustained should keep a lid on JPY. This, in turn, warrants some caution before placing aggressive bearish bets around the USD/JPY pair and positioning for a deeper intraday corrective decline.

Technical levels to watch