USDJPY surrenders modest recovery gains, back below 141.00 amid sustained USD selling

• USDJPY struggles to preserve its intraday recovery gains amid sustained USD selling.
• Bets for less aggressive Fed rate hikes and sliding US bond yields weigh on the buck.
• The risk-on impulse could undermine the safe-haven JPY and lend support to the pair.
• A more dovish BoJ might also hold back bears from placing fresh bets around USDJPY.

The USDJPY gains some positive traction on Friday and recovers a part of the previous day's softer US CPI-inspired slump to the 140.20 area, or a two-month low. The intraday uptick, however, falters in the vicinity of the mid-142.00s. The pair surrenders a major part of its intraday gains and slides back below the 141.00 mark during the first half of the European session.

The US Dollar (USD) drops to its lowest level since August 18 during the first half of the European session and turns out to be a key factor acting as a headwind for the USDJPY pair. The latest US consumer inflation figures released on Thursday indicated that the worst of the post-pandemic price spike is over. This, in turn, reaffirms expectations that the Federal Reserve will slow the pace of its policy tightening in the coming months, which, in turn, continues to weigh on the greenback.

In fact, the current market pricing points to over an 80% chance of a 50 bps Fed rate hike in December as compared to the probability of 56.8% before the US CPI report. Moreover, expectations for peak US interest rates also dropped below 5%, which is evident from a further decline in the US Treasury bond yields. The resultant narrowing of the US-Japan rate differential offers some support to the Japanese Yen and further contributes to the USDJPY pair's intraday pullback of over 170 pips.

That said, the prevalent risk-on mood, as depicted by a strong rally in the equity markets - might hold back traders from placing aggressive bullish bets around the safe-haven JPY. Apart from this, a more dovish stance adopted by the Bank of Japan could help ease the bearish pressure surrounding the USDJPY pair. Nevertheless, spot prices remain on track to register losses for the fourth successive week. Traders now look to the Preliminary Michigan US Consumer Sentiment Index for some impetus.

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