USD/JPY ticks down to mid-138.00s, holds above two-month low touched on Friday

• A combination of factors fails to assist USD/JPY to build on Friday's bounce from a two-month low.
• Speculations that the BoJ will tweak its YCC policy boost the JPY and cap the upside for the major.
• Bets that the Fed is nearing the end of its rate-hiking cycle continue to weigh on the USD and the pair.

The USD/JPY pair struggles to capitalize on Friday's goodish rebound from the 137.25 area, or a nearly two-month low and kicks off the new week on a subdued note. Spot prices oscillate in a narrow trading band through the Asian session and currently trade just above mid-138.00s, awaiting a fresh catalyst before the next leg of a directional move.

In the meantime, speculations that the Bank of Japan (BoJ) could adjust its Yield Curve Control (YCC) policy as soon as this month might continue to underpin the Japanese Yen (JPY) and act as a headwind for the USD/JPY pair. The bets were lifted by recent data, which showed that Japan's nominal base salary grew at the fastest pace in 28 years in May. Furthermore, Japanese media reported that the BoJ is likely to raise its FY2023 inflation forecast, which has exceeded the 2% goal for more than a year and should put pressure on the central bank to start unwinding its ultra-loose monetary policy settings. This has pushed the yield on the benchmark 10-year Japanese government bond to its highest level since late April last week and lent support to the JPY.

Apart from this, a mildly softer tone around the US equity futures further benefits the safe-haven JPY and contributes to capping the upside for the USD/JPY pair. This, along with the underlying bearish sentiment surrounding the US Dollar (USD), suggests that the path of least resistance for spot prices is to the downside. Investors now seem convinced that the Federal Reserve (Fed) is nearing the end of its rate-hiking cycle, especially after the latest US CPI report showed a further moderation in consumer prices. Adding to this, the US PPI recorded the smallest annual rise in nearly three years in June, which, along with signs that the US labour market is cooling, should allow the US central bank to hold interest rates after the widely anticipated 25 bps lift-off in July.

This fails to assist the USD to build on its modest bounce from the lowest level since April 2022 touched on Friday and favours the USD/JPY bears. Furthermore, technical indicators on the daily chart are holding deep in the negative territory and are still far from being in the oversold zone, validating the near-term bearish outlook for the major. Hence, any intraday positive move might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly. Market participants now look to the Chinese macro data dump, which might influence the broader risk sentiment and provide some impetus to the pair. Later during the early North American session, traders will take cues from the release of the Empire State Manufacturing Index from the US.

Technical levels to watch