USD/JPY refreshes daily low on weaker US ADP report, focus remains on FOMC

• USD/JPY turns lower for the second straight day and is pressured by a combination of factors.
• Bets for smaller Fed rate hikes, sliding US bond yields, weaker US ADP report weigh on the USD.
• The cautious market mood benefits the safe-haven JPY and contributes to the modest downall.
• The downside seems cushioned as the focus remains glued to the critical FOMC policy decision.

The USD/JPY pair meets with a fresh supply near the 130.40 region on Wednesday and drifts into negative territory for the second successive day. Spot prices remain depressed through the early North American session and slide to a fresh daily low, below mid-129.00s in reaction to a weaker-than-expected US ADP report.

In fact, Automatic Data Processing (ADP) reported that the US private sector employers added 106 jobs in January, down sharply from the previous month's upwardly revised 253K. Furthermore, the headline print was well below consensus estimates pointing to a reading of 178K, validating expectations that the Fed will slow the pace of its policy tightening. This, in turn, continues to weigh on the US Treasury bond yields, which undermines the US Dollar and exerts pressure on the USD/JPY pair.

The Japanese Yen (JPY), on the other hand, is drawing support from speculation that high inflation may invite a more hawkish stance from the Bank of Japan (BoJ) later this year. Adding to this, a softer risk tone - as depicted by a generally negative trading sentiment around the equity markets - further benefits the JPY's safe-haven status. This is seen as another factor acting as a headwind for the USD/JPY pair. The downside, however, seems limited as traders await the critical FOMC decision.

The US central bank is widely expected to deliver a smaller 25 bps. The focus, meanwhile, will remain on the accompanying monetary policy statement and Fed Chair Jerome Powell's remarks at the post-meeting press conference. Investors will look for cues about the future rate-hike path, which will play a key role in influencing the USD price dynamics. Wednesday's US economic docket also features the release of ISM Manufacturing PMI, though might do little to provide any impetus to the USD/JPY pair.

Technical levels to watch