USD/JPY consolidates in a range below 141.00 mark, downside seems cushioned

• USD/JPY edges lower at the start of a new week, though lacks follow-through selling.
• Friday's softer US PCE Price Index keeps the USD bulls on the defensive and weigh.
• The upbeat market mood undermines the safe-haven JPY and lends support to the pair.

The USD/JPY pair struggles to capitalized on Friday's solid intraday recovery of over 300 pips from the 138.00 neighbourhood, or a one-and-half-week low and kicks off the new week on a softer note. Spot prices remain on the defensive through the Asian session and currently trade around the 140.80-140.75 region, down 0.25% for the day.

The US Dollar (USD) edges lower on Monday in the wake of signs of receding underlying price pressures and is seen as a key factor acting as a headwind for the USD/JPY pair. In fact, the US Bureau of Economic Analysis reported that the Personal Consumption Expenditures (PCE) Price Index rose 0.2% last month and advanced 3.0% over the twelve months through June, registering its smallest gains since March 2021. Excluding the volatile food and energy components, the Core PCE Price Index came in at 4.1% YoY rate - the smallest increase since September 2021. This, along with reports released earlier this month, indicated a further moderation in consumer prices and could push the Federal Reserve (Fed) to end its fastest interest rate-hiking cycle since the 1980s, which keeps the USD bulls on the defensive.

That said, the stronger US GDP print pointed to an extremely resilient US economy and increased the likelihood that the Fed could hike interest rates further. It is worth recalling that Fed Chair Jerome Powell had said last week that the economy still needs to slow and the labour market to weaken for inflation to credibly return to the 2% target. This keeps the door for one more 25 bps rate-hike in September or November wide open, which remains supportive of elevated US Treasury bond yields and should help limit the downside for the USD. Apart from this, the upbeat market mood could undermine the safe-haven Japanese Yen (JPY) and lend support to the USD/JPY pair, warranting some caution for aggressive bearish traders and before positioning for the resumption of the recent corrective decline.

The markets, meanwhile, already seem to have digested the Bank of Japan's (BoJ) hawkish move to make its Yield Curve Control (YCC) policy flexible on Friday. The central bank said that the 0.5% cap on the 10-year Japanese government bond yield will now be "references" rather than "rigid limits" and that it would step in the markets at a yield of 1.0%. This was seen as a step towards the end of the BoJ's dovish stance, though the immedaite market reaction turned out to be short-lived. This, in turn, suggests that the path of least resistance for the USD/JPY pair is to the upside and subsequent downtick could be seen as a buying opportunity. Traders now look foward to this week's important US macro data scheduled for release at the beginning of a new month, including the NFP report, for some meaningful impetus.

Technical levels to watch