USD/JPY trades with modest losses around mid-137.00s, downside seems cushioned

• USD/JPY retreats from over a two-week high touched on Thursday amid some profit-taking.
• The downside remains cushioned amid the prevalent bullish sentiment surrounding the USD.
• The Fed-BoJ policy divergence favours bullish traders and supports prospects for further gains.

The USD/JPY pair pulls back from over a two-week high touched this Thursday and maintains its offered tone through the early European session. Spot prices, for now, seem to have snapped a five-day winning streak and currently trade around mid-137.00s, down nearly 0.15% for the day.

The intraday downtick lacks any obvious fundamental catalyst and could be solely attributed to some profit-taking against the backdrop of the recent rally of around 400 pips witnessed over the past week or so. That said, a combination of factors continues to act as a tailwind for the USD/JPY pair and limit the downside, warranting some caution for aggressive bearish traders.

The US Dollar (USD) stands tall near its highest level since March 24 touched on Wednesday amid speculations that the Federal Reserve (Fed) will keep interest rates higher for longer. The expectations were fueled by the recent hawkish comments by several Fed policymakers, which forced investors to scale back their bets for interest rate cuts during the second half of the year.

This, along with the latest optimism that the US debt ceiling will be raised, remains supportive of elevated US Treasury bond yields and continues to underpin the Greenback. In fact, US President Joe Biden and top congressional Republican Kevin McCarthy underscored their determination to strike a deal soon to raise the government's $31.4 trillion debt ceiling.

The Japanese Yen (JPY), on the other hand, is likely to be undermined by a more dovish stance adopted by the Bank of Japan (BoJ). 
Apart from this, a sharp deceleration in Japan's export growth, to its weakest pace in more than two years in April, might contribute to limiting losses for the USD/JPY pair and supports prospects for the emergence of some dip-buying.

The aforementioned fundamental backdrop suggests that the path of least resistance for spot prices is to the upside. Market participants now look forward to the US economic docket, featuring the release of the usual Weekly Initial Jobless Claims, the Philly Fed Manufacturing Index and Existing Home Sales data later during the early North American session.

Traders will further take cues from speeches by influential FOMC members, which, along with the US bond yields, will drive the USD demand and provide some impetus to the USD/JPY pair. Apart from this, developments surrounding the US debt-limit negotiations and the broader risk sentiment should produce short-term trading opportunities around the major.

Technical levels to watch