USD/JPY retreats further from YTD peak, drops to 138.00 as traders look to Fed’s Powell

• USD/JPY pulls back from a fresh YTD peak set on Thursday amid a modest USD downtick.
• Hawkish Fed expectations and optimism over the US debt ceiling favour the USD bulls.
• The Fed-BoJ policy divergence supports prospects for the emergence of some dip-buying.

The USD/JPY pair comes under some selling pressure on Friday and for now, seems to have snapped a six-day winning streak to its highest level since November 2022, around the 138.75 region touched the previous day. Spot prices extend the steady intraday descent through the early part of the European session and drop to the 138.00 mark, or a fresh daily low in the last hour.

The US Dollar (USD) bulls opt to take some profits off the table following the recent runup to a nearly two-month high, which, in turn, is seen as a key factor dragging the USD/JPY lower. The downside for the USD, however, remains cushioned amid firming expectations that the Federal Reserve (Fed) will keep interest rates higher for longer. In fact, Dallas Fed President Lorie Logan said on Thursday that the economic data points so far don’t justify skipping a rate increase at the next policy meeting in June. This comes on the back of the recent hawkish comments by several Fed officials and forces investors to scale back their bet for rate cuts later this year.

Adding to this, the latest optimism over the potential of lifting the US debt ceiling keeps the US Treasury bond yields elevated. It is worth mentioning that top US congressional Republican Kevin McCarthy noted that negotiations are at a better place than last week and expected a bill to raise the government's $31.4 trillion debt ceiling on the House floor next week.  This, in turn, favours the USD bulls and supports prospects for the emergence of some dip-buying around the USD/JPY pair. Apart from this, the Bank of Japan's (BoJ) dovish stance, along with a positive risk tone, could undermine the safe-haven Japanese Yen (JPY) and limit losses for the major.

The BoJ Governor Kazuo Ueda offered his take on the hot Japanese National Core CPI report released this Friday and said that 
inflation is likely to slow back below the 2% target level in the middle of the current fiscal year. Ueda added that tightening monetary policy in response to this would hurt the economy and that the BoJ will continue easing with yield curve control. This warrants some caution before placing aggressive bearish bets around the USD/JPY pair and positioning for any further intraday depreciating move.

Traders might also prefer to wait on the sidelines ahead of Fed Chair Jerome Powell's appearance later during the US session. Investors will look for clues about the US central bank's next policy move, which will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the USD/JPY pair. Apart from this, the US debt-limit negotiations might further contribute to producing short-term trading opportunities. Nevertheless, spot prices remain on track to register strong weekly gains.

Technical levels to watch