USD/JPY keeps the red below mid-137.00s amid softer USD, downside remains cushioned

• USD/JPY comes under fresh selling pressure on Friday amid a modest USD weakness.
• The Fed’s hawkish outlook to revive the USD demand and lend support to the major.
• Fading safe-haven demand could undermine the JPY and help limit losses for the pair.

The USD/JPY pair meets with a fresh supply on Friday and erodes a part of the previous day's rally to over a two-week high. The pair maintains its offered tone through the early European session, though has managed to recover a few pips from the daily low and is currently placed just below mid-137.00s.

The US Dollar struggles to capitalize on the overnight recovery move from a six-month low and comes under some renewed selling pressure on the last day of the week. This, in turn, is seen as a key factor acting as a headwind for the USD/JPY pair. That said, the Fed's hawkish outlook should help revive the USD demand and lend some support to the major, at least for the time being.

It is worth recalling that the US central bank struck a more hawkish tone on Wednesday and signalled that it will continue to raise rates to crush inflation. In the so-called dot plot, policymakers projected at least an additional 75 bps increases in borrowing costs by the end of 2023 and see the terminal rate rising to 5.1%, higher than the 4.6% level forecasted in September.

Apart from this, signs of stability in the financial markets could undermine the safe-haven Japanese Yen and contribute to limiting the downside for the USD/JPY pair. Even from a technical perspective, repeated failures to find bearish acceptance below the very important 200-day SMA and the subsequent bounce warrant caution before positioning for a further near-term depreciating move.

Market participants now look forward to the release of the flash US PMI prints, due later during the early North American session. The data might influence the USD price dynamics, which, along with the broader risk sentiment, should provide some impetus to the USD/JPY pair. Nevertheless, spot prices remain on track to post modest gains for the second successive week.

Technical levels to watch