USD/JPY retreats further from YTD top amid weaker USD, holds above 136.00 mark

• USD/JPY meets with some supply on Thursday and is pressured by a combination of factors.
• Recession fears benefit the safe-haven JPY and weigh on the pair amid a modest USD slide.
• The Fed-BoJ policy divergence favours bulls and should help limit any meaningful downfall.

The USD/JPY pair comes under some selling pressure on Thursday and moves away from its highest level since mid-December, around the 137.90 region touched the previous day. The pair extends its steady intraday descent through the first half of the European session and drops to a fresh daily low, around the 136.20 region in the last hour.

Worries about a deeper global economic downturn continue to weigh on investors' sentiment, which, in turn, is seen benefiting the safe-haven Japanese Yen (JPY) and dragging the USD/JPY pair lower. The concerns were further fueled by softer Chinese inflation figures released earlier this Thursday, which showed that domestic demand remains tepid and dashed hopes for a strong recovery in the world's second-largest economy. This, along with a modest US Dollar pullback from a three-month top, contributes to the offered toe surrounding the major.

The downside for the USD/JPY pair, however, is more likely to remain limited, at least for the time being, amid expectations that the Bank of Japan (BoJ) will stick to its dovish stance to support the fragile domestic economy. The bets were reaffirmed by the release of the final GDP print, which pointed to continued weakness in the economy. Moreover, the incoming BoJ Governor Kazuo Ueda recently stressed the need to maintain the ultra-loose policy settings and said that the central bank isn't seeking a quick move away from a decade of massive easing.

In contrast, Federal Reserve Chair Jerome Powell reiterated on Wednesday that interest rates would have to go higher and possibly faster to tame stubbornly high inflation. In fact, the markets are now pricing in a greater chance of a jumbo 50 bps lift-off at the next FOMC meeting on March 21-21, which remains supportive of elevated US Treasury bond yields. This, in turn, favours the USD bulls and supports prospects for the emergence of some dip-buying around the USD/JPY pair, warranting caution before positioning for any meaningful corrective fall.

Market participants now look to the US economic docket, featuring the release of Challenger Job Cuts and the usual Weekly Initial Jobless Claims later during the early North America session. The focus, however, will remain on the BoJ monetary policy decision, scheduled to be announced during the Asian session on Friday. This will be followed by the US monthly jobs data, popularly known as the NFP report, which should help investors to determine the next leg of a directional move for the USD/JPY pair.

Technical levels to watch