USD/JPY recovers modest intraday losses to weekly low, lacks follow-through

• USD/JPY reverses an intraday dip to the weekly low amid a modest USD recovery.
• The Fed’s less hawkish outlook to cap the buck and act as a headwind for the pair.
• US banking jitters could benefit the safe-haven JPY and warrant caution for bulls.

The USD/JPY pair attracts some buying near the 134.15 area, or the weekly low touched this Thursday and climbs to the top end of its daily range during the early European session. The pair is currently placed around the 134.65-134.70 region and for now, seems to have stalled its retracement slide from a nearly two-month high touched on Tuesday.

The US Dollar (USD) stages a modest recovery from over a one-week low and turns out to be a key factor lending some support to the USD/JPY pair. The modest USD bounce, meanwhile, lacks any obvious fundamental catalyst and is more likely to remain capped amid the Federal Reserve's (Fed) less hawkish outlook. In fact, the US central bank, as was widely anticipated, raised interest rates by 25 bps and opened the door for a possible pause in June.

In the post-meeting presser, Powell signalled that the Fed was close to hitting the terminal rate of the current hiking cycle, though did not explicitly confirm a pause. Powell also warned that US economic growth was cooling and noted that credit conditions were likely to tighten further in the wake of growing pressure on banks. This, along with concerns over the US debt ceiling, drags the US Treasury bond yields lower and acts as a headwind for the USD.

Apart from this, looming recession risks continue to weigh on investors' sentiment, which could benefit the JPY's relative safe-haven status and contribute to capping the USD/JPY pair, at least for the time being. The downside, meanwhile, remains cushioned amid a more dovish stance adopted by the BoJ, leaving its ultra-loose monetary policy settings unchanged and making no tweaks to its yield curve control (YCC) by a unanimous vote last week.

The aforementioned mixed fundamental backdrop makes it prudent to wait for strong follow-through buying before confirming that the USD/JPY pair has formed a near-term bottom and positioning for any meaningful appreciating move. Traders might also refrain from placing aggressive directional bets and prefer to wait on the sidelines ahead of the release of the closely-watched US monthly jobs data, popularly known as the NFP report on Friday.

In the meantime, the US Weekly Initial Jobless Claims data might provide some impetus later during the early North North American session on Thursday. This, along with the US bond yields, could influence the USD price dynamics. Apart from this, the post-European Central Bank (ECB) volatility in the markets will drive demand for the safe-haven JPY and contribute to producing short-term trading opportunities around the USD/JPY pair.

Technical levels to watch