USD/JPY pulls back from YTD peak, trades with modest losses below mid-143.00s

• USD/JPY edges lower on Monday and snaps a three-day winning streak to a fresh YTD peak.
• Fresh intervention fears benefit the JPY and exert pressure amid a modest USD weakness.
• The Fed’s hawkish outlook should act as a tailwind for the USD and limit losses for the pair.

The USD/JPY pair kicks off the new week on a softer note and erodes a part of Friday's gains to the 144.00 neighbourhood, or a fresh high since November 2022. Spot prices trade around the 143.30 area during the Asian session, down just over 0.15% for the day, and for now, seems to have snapped a three-day winning streak.

The Japanese Yen (JPY) strengthens a bit in reaction to Japan’s top currency diplomat Masato Kanda warning that recent moves in the domestic currency were "rapid" and that authorities will respond to any excessive moves in the currency market. Adding to this, the Bank of Japan (BoJ), in the Summary of Opinions from the latest monetary policy meeting held in June, noted that there is strong chance consumer inflation will moderate, but won't slow back below 2%, toward the middle of current fiscal year. This, in turn, fuels speculations that the BoJ might cut back on its super-easy policy and lends additional support to the JPY. Apart from this, a modest US Dollar (USD) downtick exerts prompts bulls to take some profits off the table and exerts some downward pressure on the USD/JPY pair.

The S&P Global reported on Friday that business activity in the US fell to a three-month low in June as services growth eased for the first time this year and the contraction in the manufacturing sector deepened. This, in turn, is seen as a key factor that weighs on the Greenback. The overall picture, however, indicated that the US economic growth ticked up a notch in the second quarter. This, along with the Federal Reserve's (Fed) hawkish outlook, might hold back traders from placing aggressive bearish bets around the USD and help limit any meaningful corrective decline for the USD/JPY pair, at least for now. It is worth recalling that the Fed earlier this month, though decided to pause its year-long rate-hiking cycle, signalled that borrowing costs may still need to rise as much as 50 bps by the end of this year.

Furthermore, Fed Chair Jerome Powell, during his two-day congressional testimony last week, reiterated that the central bank will likely raise interest rates again this year, albeit at a "careful pace", to combat stubbornly high inflation. Powell added that the Fed doesn't see rate cuts happening any time soon and is going to wait until it is confident that inflation is moving down to the 2% target. Hence, the market focus now shifts to this week's release of the US Core PCE Price Index - the Fed's preferred inflation gauge on Friday. The data might influence market expectations about the Fed's next policy move, which, in turn, will drive the USD demand and provide a fresh directional impetus to the USD/JPY pair. This makes it prudent to wait for some follow-through selling before confirming that spot prices have topped out in the near term.

Technical levels to watch