USD/JPY corrects further from YTD peak, drops to 139.00s on weaker USD

• USD/JPY retreats from the YTD peak amid a modest USD pullback from over a two-month high.
• A softer risk tone benefits the safe-haven JPY and further contributes to the intraday downfall.
• The Fed-BoJ policy divergence should help limit losses ahead of the US Core PCE Price Index.

The USD/JPY pair comes under some selling pressure on the last day of the week and extends its steady intraday slide through the first half of the European session. Spot prices drop to mid-139.00s in the last hour, reversing the previous day's positive move to the highest level since November 2022.

The US Dollar (USD) pulls back from over a two-month high touched on Thursday and turns out to be a key factor dragging the USD/JPY pair lower. The Japanese Yen (JPY), on the other hand, attracts some heaven flows amid growing worries of a global economic slowdown and US debt ceiling woes. This further contributes to the offered tone surrounding the major, though any meaningful corrective decline still seems elusive.

A more dovish stance adopted by the Bank of Japan (BoJ), along with the softer domestic data, could act as a headwind for the JPY and lend some support to the USD/JPY pair. In fact, BoJ Governor Kazuo Ueda had reiterated recently that the central bank will continue easing with yield curve control. Furthermore, the Tokyo CPI released this Friday showed that inflation in Japan’s capital city eased more than expected in May.

The Federal Reserve (Fed), on the other hand, is expected to keep interest rates higher for longer to combat stick inflation. In fact, the markets have started pricing in the possibility of another 25 bps lift-off at the June FOMC policy meeting and the bets were lifted by the recent comments by a slew of Fed officials. Adding to this, Thursday's upbeat US macro data could allow the US central bank to stick to its hawkish stance.

This has been pushing the US Treasury bond yields higher recently, widening the US-Japan rate differential and supporting prospects for the emergence of some dip-buying around the USD/JPY pair. The USD bulls, however, seem reluctant to place aggressive bets and await the release of the Core PCE Price Index - the Fed's preferred inflation gauge - later during the early North American session for a fresh impetus.

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