USD/JPY slides back closer to 143.00 mark, downside potential seems limited

• USD/JPY edges lower on Wednesday and snaps a two-day winning streak.
• A softer risk tone benefits the safe-haven JPY and exerts some pressure.
• The divergent BoJ-Fed policy outlook is likely to limit any meaningful fall.

The USD/JPY pair struggles to capitalize on its strong weekly gains registered over the past two days and edges lower during the Asian session on Wednesday. Spot prices currently trade around the 143.15 region, down nearly 0.15% for the day, though any meaningful downside still seems elusive, warranting some caution for bearish traders.

Weaker Chinese trade data released on Tuesday dampened investors' appetite for riskier assets. Adding to this, credit rating agency Moody’s downgraded the debt ratings on a slew of US banks on concerns about pressures on profit and led to the overnight slide in the equity markets. This, in turn, lends some support to the safe-haven Japanese Yen (JPY), which, along with subdued US Dollar (USD) price action, is seen acting as a headwind for the USD/JPY pair. The downside, however, remains cushioned in the wake of a big divergence in the monetary policy stance adopted by the Bank of Japan (BoJ) and the Federal Reserve (Fed).

Market participants seem convinced that the BoJ will stick to its dovish stance and the bets were reaffirmed by data released on Tuesday, which showed that real wages in Japan fell for a 15th straight month in June and nominal pay growth also slowed. It is worth recalling that the BoJ has emphasised that sustainable pay hikes is a prerequisite to consider exiting easy policies and dismantling its massive monetary stimulus. Moreover, the BoJ's Summary of Opinions released on Monday revealed that policymakers backed the case for the need to patiently continue with the current monetary easing towards achieving the price stability target.

In contrast, the continued tightness in the US labour market raised the odds of a soft landing for the US economy and supports prospects for further policy tightening by the Fed. In fact, a slight disappointment from the headline NFP print on Friday was largely offset by solid wage growth and an unexpected downtick in the jobless rate. Adding to this, Fed Governor Michele Bowman said on Monday that additional interest rate hikes will likely be needed to lower inflation to the central bank's 2% target. This, in turn, keeps the door for one more 25 bps lift-off in September or November wide open and should continue to underpin the USD.

The aforementioned fundamental backdrop seems tilted firmly in favour of bulls and suggests that the path of least resistance for the USD/JPY pair is to the upside. Hence, any subsequent slide might still be seen as a buying opportunity. Market participants now look to the Chinese inflation data, due for release in a short while from now, which might influence the broader risk sentiment and provide some impetus to the USD/JPY pair. The focus, however, will remain glued to the crucial US CPI report on Thursday.

Technical levels to watch