USD/JPY weakens further below 129.00 mark, over two-week low amid risk-off

• USD/JPY came under intense selling pressure on Thursday and dropped to over a two-week low.
• The risk-off mood underpinned the safe-haven JPY and exerted pressure amid sliding US bond yields.
• Aggressive Fed rate hike bets continued acting as a tailwind for the USD and might extend support.

The USD/JPY pair witnessed aggressive selling during the early European session and dived to a two-week low, closer to mid-128.00s in the last hour.

A combination of factors exerted heavy pressure on the USD/JPY pair for the second successive day on Thursday and dragged spot prices further away from over a two-decade high touched earlier this week. The prevalent risk-off environment - as depicted by an extended sell-off in the equity markets - boosted demand for the safe-haven Japanese yen. This, along with a further pullback in the US Treasury bond yields, further inspired bearish traders and exerted downward pressure on the USD/JPY pair.

The yearly US CPI print suggested that inflationary pressures in the world's biggest economy are peaking. This, along with the anti-risk flow, dragged the yield on the benchmark 10-year US government bond to a two-week low. Apart from this, technical selling below the 100-period SMA support, around mid-129.00s, was seen as another factor that contributed to the USD/JPY pair's downfall. A subsequent slide below the 129.00 round-figure mark might have already set the stage for additional losses.

That said, the underlying bullish sentiment surrounding the US dollar could lend some support to the USD/JPY pair and limit the ongoing corrective slide. The headline and core US CPI were strong enough to reinforce market bets for a more aggressive policy tightening by the Fed. In fact, money market futures are now pricing in an 81% chance of a jumbo 75 bps rate hike in June. This should continue to act as a tailwind for the USD and spot prices amid a big divergence in the Fed-BoJ policy outlooks.

Technical levels to watch