USD/JPY remains depressed around 135.00 mark, modest USD strength limits losses

• USD/JPY edges lower on Tuesday in reaction to BoJ Governor Ueda’s hawkish remarks.
• A modest USD strength lends some support to the major and helps limit the downside.
• Traders also seem reluctant to place aggressive bets ahead of the US CPI on Wednesday.

The USD/JPY pair retreats from a four-day high, around the 135.30-135.35 region touched earlier this Tuesday and extends its steady intraday descent through the first half of the European session. Spot prices, however, rebound a few pips and now trade with only mild intraday losses, just below the 135.00 psychological mark.

The Japanese Yen (JPY) gets a minor lift in reaction to hawkish-sounding remarks by the Bank of Japan (BoJ) Governor Kazuo Ueda, which, in turn, exerts some downward pressure on the USD/JPY pair. Speaking in parliament, Ueda said Japan's economy was picking up and inflation expectations remain at high levels. He added that the central bank will end its yield curve control policy and then start shrinking its balance sheet, once prospects heighten for inflation to sustainably hit its 2% target.

The US Dollar (USD), on the other hand, continues to draw support from the overnight rally in the US Treasury bond yields, led by easing fears of a full-blown banking crisis. In fact, the Federal Reserve's (Fed) Senior Loan Officer Opinion Survey (SLOOS) showed on Monday that tightening credit conditions was due to the aggressive rate hikes rather than severe banking sector stress. This holds back traders from placing aggressive bearish bets around the USD/JPY pair and helps limit losses.

The upside for the USD, meanwhile, seems limited in the wake of a less hawkish stance adopted by the Fed. In fact, the US central bank last week outlined a more stringent, data-driven approach to raising rates further, opening the door for an imminent pause in its year-long rate-hiking cycle. Moreover, the markets have been pricing in potential rate cuts during the second half of this year. This might continue to act as a headwind for the USD/JPY pair ahead of the crucial US CPI report.

The latest US consumer inflation figures, due on Wednesday, will play a key role in influencing expectations about the Fed's next policy move. This, in turn, will drive the USD demand and help determine the near-term trajectory for the USD/JPY pair. Heading into the key data risk, the buck remains at the mercy of the US bond yields in the absence of any relevant market-moving economic releases from the US and ahead of a scheduled speech by New York Fed President John Williams.

Technical levels to watch