USD/JPY keeps the red amid weaker USD, holds above mid-147.00s ahead of US ISM PMI

• USD/JPY comes under some selling pressure on Tuesday amid broad-based USD weakness.
• Expectations that the Fed will soften its hawkish stance act as a headwind for the greenback.
• The Fed-BoJ policy divergence should limit losses for the pair ahead of the FOMC meeting.

The USD/JPY pair meets with a fresh supply on Tuesday and drops to mid-147.00s, or a fresh daily low during the first half of the European session. The pair, for now, seems to have stalled its recovery from the 145.00 psychological mark, or a nearly three-week low touched last Thursday and is pressured by a combination of factors.

The Japanese yen draws some support from speculations that authorities might step in again to soften any further steep fall in the domestic currency. It is worth mentioning that Japan spent a record ¥6.3499 trillion over two consecutive trading days of unannounced currency interventions in October. This, along with the emergence of some selling around the US dollar, is exerting downward pressure on the USD/JPY pair.

In fact, the USD Index, which measures the greenback's performance against a basket of six currencies, fails to capitalize on its recent bounce from over a one-month low amid the prospects for a less hawkish Fed. Market participants now expect the US central bank to soften its hawkish stance amid signs of a slowdown in the US economy. This is reinforced by the ongoing slide in the US Treasury bond yields and weighs on the buck.

The Fed, however, remains on track to deliver another supersized 75 bps rate hike - its fourth such increase in a row - at the end of a two-day policy meeting on Wednesday. In contrast, the Bank of Japan held interest rates at record lows last Friday and reiterated that it will continue to guide the 10-year bond yield at 0%. This marks a big divergence between the two central banks and should offer some support to the USD/JPY pair.

Furthermore, traders might also be reluctant to place aggressive directional bets and prefer to move to the sidelines ahead of the key central bank event risk. In the meantime, Tuesday's US economic docket, highlighting the release of the ISM Manufacturing PMI, will be looked upon for short-term opportunities around the USD/JPY pair.

Technical levels to watch