USD/JPY slides further below 136.00 mark, downside potential seems limited

• USD/JPY edges lower on Tuesday and snaps a three-day winning streak to over a one-week high.
• Looming recession risks benefit the safe-haven JPY and exert downward pressure on the major.
• The Fed-BoJ policy divergence to limit losses as traders look forward to the US Retail Sales data.

The USD/JPY pair comes under some selling pressure on Tuesday and for now, seems to have snapped a three-day winning streak to a one-and-half-week high, around the 136.30-136.35 region touched the previous day. Spot prices remain depressed through the early European session and currently trade just below the 136.00 round-figure mark, down nearly 0.20% for the day.

A generally weaker tone around the equity markets drives some haven flows towards the Japanese Yen (JPY) and turns out to be a key factor weighing on the USD/JPY pair. The weaker-than-expected Chinese macro data released on Tuesday adds to worries about a global economic slowdown and tempers investors' appetite for riskier assets. The flight to safety, along with a standoff to raise the federal government's borrowing limit, is seen dragging the US Treasury bond yields lower. This, in turn, keeps the US Dollar (USD) bulls on the defensive and contributes to the offered tone surrounding the major.

It is worth recalling that US President Joe Biden expressed confidence that a deal could be done in time ahead of an expected meeting with congressional leaders later today. Republican House of Representatives Speaker Kevin McCarthy, however, said the two sides were still far apart. The downside for the USD, meanwhile, seems limited amid speculations that the Federal Reserve (Fed) will stick to its hawkish stance. The bets were lifted by the Michigan survey on Friday, which showed that consumers see prices over the next five years climbing at an annual rate of 3.2%  - the highest since 2011.

Furthermore, the overnight hawkish comments by several Fed officials suggest that the US central bank will keep interest rates higher for longer. In contrast, the Bank of Japan (BoJ) Governor Kazuo Ueda said last week that it was too early to discuss specific plans for an exit from the massive stimulus program. This marks a big divergence in the Fed-BoJ policy outlook, which should cap any meaningful gains for the JPY and supports prospects for the emergence of some dip-buying around the JPY. This makes it prudent to wait for strong follow-through selling before confirming that spot prices have topped out.

Market participants now look forward to the release of the US monthly Retail Sales figures, due later during the early North American session. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to the USD/JPY  pair. Apart from this, traders will take cues from the broader risk sentiment to grab short-term opportunities ahead of the prelim Japanese GDP report, scheduled for release during the Asian session on Wednesday.

Technical levels to watch