USD/JPY remains on the defensive, holds above 143.00 ahead of US Consumer Sentiment Index

• USD/JPY comes under some selling pressure on Friday, though lacks follow-through.
• The risk-off mood, chances of BoJ intervention offer support to the safe-haven JPY.
• Resurgent USD demand helps limit the downside amid the Fed-BoJ policy divergence.

The USD/JPY pair struggles to capitalize on its modest intraday bounce and met with a fresh supply near the 143.70 region on Friday. The pair remains on the defensive through the early North American session and is currently placed near the lower end of its daily trading range, just a few pips above the 143.00 mark.

A fresh wave of the global risk-aversion trade - as depicted by a sell-off around the equity markets - drives some haven flows towards the Japanese yen and exerts some downward pressure on the USD/JPY pair. Despite the upbeat Chinese macro data released earlier this Friday, investors remain concerned about headwinds stemming from fresh COVID-19 restrictions in the world's second-largest economy. Apart from this, the prospects for a more aggressive policy tightening by major central banks and the protracted Russia-Ukraine war has been fueling recession fears. Growing worries about a deeper economic downturn temper investors' appetite for riskier assets and benefit traditional safe-haven currencies.

Furthermore, speculations that the Bank of Japan may soon step in to arrest any further freefall in the JPY further contributes to the offered tone surrounding the USD/JPY pair. The downside, however, remains cushioned amid resurgent US dollar demand, bolstered by hawkish Fed expectations. Investors seem convinced that the Fed will tighten its monetary policy at a faster pace to tame inflation and have been pricing in the possibility of a full 100 bps rate hike at the September meeting. This marks a big divergence in comparison to a more dovish stance adopted by the Japanese central bank and supports prospects for the emergence of some dip-buying at lower levels, warranting caution for bearish traders.

Next on tap will be the release of the Preliminary Michigan US Consumer Sentiment Index for September. This, along with the  US bond yields, will drive the USD demand. Apart from this, the broader market risk sentiment should produce short-term trading opportunities around the USD/JPY pair. Traders, however, might refrain from placing aggressive bets and prefer to move to the sidelines ahead of next week's key central bank event risks. The Fed is scheduled to announce its policy decision and will be followed by the BoJ meeting on Thursday. This will play a key role in determining the next leg of a directional move for the USD/JPY pair.

Technical levels to watch