USD/JPY flirts with daily lows, struggles to defend 114.00 mark

• USD/JPY witnessed a modest pullback from near two-week tops touched earlier this Friday.
• A combination of factors should help limit the corrective slide and attract some dip-buying.

The USD/JPY pair edged lower through the early North American session and dropped to fresh daily lows, below the 114.00 mark in the last hour.

The pair struggled to capitalize on its intraday uptick, instead witnessed a modest pullback from the 114.30 area, or near two-week tops touched earlier this Friday. The downtick could be attributed to some profit-taking amid a subdued US dollar demand and following this week's rally of over 150 pips, triggered by hotter-than-expected US CPI.

Meanwhile, the downside remains cushioned on the back of a positive tone around the equity markets, which tends to undermine the safe-haven Japanese yen, and elevated US Treasury bond yields. The hotter-than-expected US CPI print released on Wednesday reaffirmed hawkish Fed expectations and continued acting as a tailwind for the US bond yields.

Investors now seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflationary pressures. In fact, the Fed funds futures indicate that the first rate hike could come as soon as July 2022. This should assist the greenback to attract some dip-buying and lend some support to the USD/JPY pair.

That said, the pair's inability to gain follow-through traction warrants caution for bullish traders. Next on tap will be the release of the Prelim Michigan Consumer Sentiment Index from the US. This, along with the US bond yields, will influence the USD. Traders will further take cues from the market risk sentiment for some impetus around the USD/JPY pair.

Technical levels to watch