USD/JPY remains depressed below 128.00 mark, downside seems cushioned

• Modest USD pullback dragged USD/JPY lower for the second successive day on Tuesday.
• The Fed-BoJ policy divergence acted as a tailwind and helped limit any meaningful slide.
• Investors now eye US economic data for some impetus ahead of the BoJ on Thursday.

The USD/JPY pair remained on the defensive through the early European session and was last seen trading with modest intraday losses, just below the 128.00 mark.

The US dollar eased a bit from its highest level since March 2020 touched the previous session, which, in turn, was seen as a key factor that dragged the USD/JPY pair lower for the second straight day. The downside, however, remains cushioned amid a big divergence in the monetary policy stance adopted by the Fed and the Bank of Japan.

Hawkish comments by various FOMC officials last week, including Fed Chair Jerome Powell, reaffirmed that the Fed would tighten its monetary policy at a faster pace to curb soaring inflation. In fact, the markets now expect the US central bank to raise interest rates by 50 bps at each of its next four meetings in May, June, July and September.

In contrast, the BoJ has repeatedly said that it remains ready to use tools to avoid long-term rates from rising too much and sustain the current powerful monetary easing to support the economy. It is worth recalling that the BoJ last week again offered to buy unlimited amounts of Japanese government bonds to defend the 0.25% yield cap.

This, along with modest uptick in the US Treasury bond yields, favour bulls and support prospects for the emergence of some dip-buying around the USD/JPY pair. Traders, however, might refrain from placing aggressive bets and prefer to wait on the sidelines ahead of the BoJ monetary policy decision and the economic outlook report on Thursday.

In the meantime, traders will take cues from the US economic docket, featuring the release of Durable Goods Orders and the Conference Board's Consumer Confidence Index. This, along with the US bond yields, will influence the USD price dynamics. Apart from this, the broader market risk sentiment should provide some impetus to the USD/JPY pair.

Technical levels to watch