USD/JPY flirts with 130.00 mark, downside seems cushioned ahead of US CPI

• USD/JPY came under fresh selling pressure on Wednesday amid modest USD weakness.
• Retreating US bond yields kept the USD bulls on the defensive and weighed on the pair.
• A positive risk tone, the Fed-BoJ policy divergence to limit losses ahead of the US CPI.

The USD/JPY pair witnessed some selling during the early part of the European session and dropped to a fresh daily low, around the 129.90 area in the last hour.

Following a brief consolidation through the first half of trading on Wednesday, the USD/JPY pair met with a fresh supply and slipped back below the 130.00 psychological mark. The ongoing retracement slide in the US Treasury bond yields weighed on the US dollar, which, in turn, exerted downward pressure on spot prices.

The downside, however, seems limited amid a generally positive tone around the equity markets, which tends to undermine the safe-haven Japanese yen. Apart from this, a big divergence in the monetary policy stance adopted by the Bank of Japan and the Fed should hold back bearish traders from placing aggressive bets around the USD/JPY pair.

The Japanese central bank has vowed to keep its existing ultra-loose policy settings and promised to conduct unlimited bond purchase operations to defend its “near-zero” target for 10-year yields. In contrast, the Fed is widely expected to tighten its monetary policy at a faster pace to combat stubbornly high inflation.

In fact, the markets are pricing in a 200 bps rate hike for the rest of 2022 amid concerns that China's zero-covid policy and the war in Ukraine would result in tight global supply chains and push consumer prices higher. Hence, the focus will remain glued to the US CPI report, due for release later during the early North American session.

Ahead of the key data risk, the US bond yields will continue to play a key role in influencing the USD price dynamics. Apart from this, traders will take cues from the broader market risk sentiment to grab some short-term opportunities around the USD/JPY pair.

Technical levels to watch