USD/JPY slides below 115.00 mark amid weaker USD, downside potential seems limited

• USD/JPY edged lower for the third successive day on Tuesday amid modest USD weakness.
• The divergent Fed-BoJ policy outlooks support prospects for the emergence of dip-buying.
• Traders now look forward to the US ISM Manufacturing PMI for short-term opportunities.

The USD/JPY pair dropped to a three-day low during the Asian session, with bears now looking to extend the downward trajectory further below the key 115.00 psychological mark.

Following an early uptick to the 115.20 area, the USD/JPY pair met with a fresh supply on Tuesday and drifted into the negative territory for the third successive day. The downtick dragged spot prices further away from a near three-week high touched last Friday and was sponsored by modest US dollar weakness.

Expectations that the Fed will tighten its monetary policy at a faster pace than anticipated now seem to have dampened future growth prospects. This played out in the money markets, where the gap between 2 and 10-year US government bonds fell below 60 bps for the first time since early November and undermined the buck.

Atlanta Fed President, Raphael Bostic reinforced speculations and said that the US central bank could raise its benchmark rate by 50 bps if a more aggressive approach to combat stubbornly high is needed. Moreover, the markets have been pricing in the possibility of five quarter-point rate hikes by the end of 2022.

On the other hand, the Bank of Japan has repeatedly reaffirmed to continue with its persistent and powerful monetary easing until further notice. The divergence in the monetary policy stance between the Fed and BoJ favours bullish traders and supports prospects for the emergence of some dip-buying around the USD/JPY pair.

The fundamental backdrop makes it prudent to wait for some follow-through selling before confirming that the recent strong rebound from the 113.45 area has run out of steam. Market participants now look forward to the release of the US ISM Manufacturing PMI for some short-term opportunities around the USD/JPY pair.

Technical levels to watch