USD/JPY remains depressed below 127.00 mark, bears await break below monthly low

• A combination of factors prompted fresh selling and dragged USD/JPY closer to the monthly low.
• Recession fears benefitted the safe-haven JPY and exerted pressure amid subdued USD demand.
• The Fed-BoJ policy divergence might help limit further losses ahead of the top-tier US macro data.

The USD/JPY pair maintained its offered tone through the first half of the European session and was last seen trading around the 126.75 region, just a few pips above the daily low.

The pair struggled to capitalize on the overnight modest recovery gains, instead came under renewed selling pressure on Thursday and retreated over 100 pips from the daily swing high. The prospects for a more aggressive move by major central banks to constrain inflation, along with the Russia-Ukraine war, have been fueling recession fears. This, in turn, continued lending some support to the safe-haven Japanese yen and acted as a headwind for the USD/JPY pair amid subsequent US dollar price action.

Minutes from the May 3-4 FOMC meeting showed that most participants believed a 50 bps rate hike would likely be appropriate in June and July. This, however, was fully priced in the markets and the lack of any major surprises reaffirmed the idea that the Fed could pause the rate hike cycle later this year. This, in turn, dragged the yield on the benchmark 10-year US government bond to a fresh six-week low, which kept the USD bulls on the defensive and further exerted downward pressure on the USD/JPY pair.

With the latest leg down, spot prices have moved well within the striking distance of the monthly low touched on Tuesday. It, however, remains to be seen if bearish are able to maintain their dominant position amid a big divergence in the monetary policy stance adopted by the Fed and the Bank of Japan. Hence, it will be prudent to wait for some follow-through selling before confirming a fresh bearish breakdown and positioning for any further near-term depreciating move for the USD/JPY pair.

Market participants now look forward to the US economic docket - featuring the release of the Prelim Q1 GDP, the usual Weekly Initial Jobless Claims and Pending Home Sales. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to the USD/JPY pair. Traders will further take cues from the broader market risk sentiment to grab short-term opportunities.

Technical levels to watch