USD/JPY slides to mid-136.00s amid renewed USD selling, downside potential seem limited

• USD/JPY edges lower on Thursday amid the emergence of fresh selling around the USD.
• A combination of factors favours bullish traders support prospects for some dip-buying.
• Hawkish Fed expectations and elevated US bond yields should limit losses for the buck.
• The Fed-BoJ policy divergence, the risk-on impulse could undermine the safe-haven JPY.

The USD/JPY pair struggles to capitalize on the overnight goodish rebound of over 100 pips and meets with a fresh supply on Thursday. Spot prices extend the steady intraday descent through the early European session and drop to a fresh daily low, below mid-136.00s in the last hour.

The US dollar hits a fresh weekly low amid some repositioning trade ahead of the Jackson Hole Symposium and turns out to be a key factor exerting some downward pressure on the USD/JPY pair. Apart from this, the intraday downtick lacks any obvious fundamental catalyst and is more likely to remain limited in the wake of hawkish Fed expectations.

Market participants seem convinced that the Fed will stick to its policy tightening to tame inflation. The bets were reaffirmed by the recent hawkish remarks by several Fed officials and reinforced by elevated US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond holds steady near a two-month high.

In contrast, Bank of Japan (BoJ) board member Toyoaki Nakamura reiterates on Thursday that the central bank must patiently maintain powerful monetary easing. This reinforces expectations that the BoJ is unlikely to move toward policy normalization. This marks a big divergence in comparison to a more hawkish Fed, which could undermine the Japanese yen.

Apart from this, the risk-on impulse - as depicted by a strong rally in the US equity futures - might weigh on the safe-haven JPY and lend support to the USD/JPY pair. Furthermore, expectations that Fed Chair Jerome Powell will deliver a hawkish message on Friday support prospects for the emergence of some dip-buying and warrant caution for bearish traders.

Market participants now look forward to the US economic docket - featuring the release of the Prelim, or the second estimate of Q2 GDP print and Weekly Initial Jobless Claims. This, along with the US bond yields, might influence the USD price dynamics. Traders will also take cues from the broader risk sentiment to grab short-term opportunities around the USD/JPY pair.

Technical levels to watch