USD/JPY trades with modest losses below mid-138.00s amid softer risk tone, fresh USD selling

• USD/JPY meets with some supply on Monday and is pressured by a combination of factors.
• Speculations that the BoJ will tweak its YCC policy and a softer risk tone underpin the JPY.
• The emergence of some USD selling further contributes to the offered tone around the pair.

The USD/JPY pair struggles to capitalize on Friday's goodish rebound from the vicinity of confluence support, comprising the 100-day and the 200-day Simple Moving Averages (SMAs) and edges lower on the first day of a new week. Spot prices remain on the defensive through the early part of the European session and currently trade just below mid-138.00s, down nearly 0.30% for the day.

A weak GDP report from China confirmed that the post-pandemic recovery in the world's second-largest economy is faltering rapidly due to weakening demand at home and abroad. This, in turn, adds to worries about a global economic downturn and continues to weigh on investors' sentiment, which, in turn, benefits the safe-haven Japanese Yen (JPY). Moreover, speculations that the Bank of Japan (BoJ) could adjust its Yield Curve Control (YCC) policy as soon as this month further underpin the JPY and exert some downward pressure on the USD/JPY pair.

The recent data showed that Japan's nominal base salary grew at the fastest pace in 28 years in May. This is expected to push inflation higher, which has exceeded the 2% goal for more than a year. Furthermore, Japanese media reported that the BoJ is likely to raise its FY2023 inflation forecast, fueling speculations that the central bank might start unwinding its ultra-loose monetary policy settings sooner rather than later. The expectations had lifted the yield on the benchmark 10-year Japanese government bond to its highest level since late April last week.

In contrast, market participants now seem convinced that the Federal Reserve (Fed) is nearing the end of its policy tightening cycle and will keep interest rates steady following the widely anticipated 25 bps lift-off in July. This, in turn, prompts fresh selling around the US Dollar (USD), which languishes near its lowest level since April 2022 touched on Friday and contributes to the mildly offered tone surrounding the USD/JPY pair. The aforementioned fundamental backdrop favours bearish traders and suggests that the path of least resistance for spot prices is to the downside.

Market participants now look to the release of the Empire State Manufacturing Index, due later during the early North American session. The data might influence the USD price dynamics and provide some impetus to the USD/JPY pair. Apart from this, the broader risk sentiment should allow traders to grab short-term opportunities.

Technical levels to watch