USD/JPY remains on the defensive below 142.00 mark, downside seems limited

• USD/JPY pulls back from a fresh YTD peak touched on Wednesday, albeit lacks follow-through.
• Powell’s less hawkish remarks keep the USD bulls on the defensive and act as a headwind.
• The Fed-BoJ policy divergence continues to undermine the JPY and helps limit the downside.

The USD/JPY pair edges lower during the Asian session on Thursday and moves away from a fresh high since November 2022, around the 142.35 area touched the previous day. Spot prices, however, manage to hold above the 100-hour Simple Moving Average (SMA) and currently trade just below the 142.00 round-figure mark.

The US Dollar (USD) consolidates the overnight slide back closer to the monthly low in the wake of Federal Reserve (Fed) Chair Jerome Powell's less hawkish remarks and turns out to be a key factor acting as a headwind for the USD/JPY pair. Testifying before the House Financial Services Committee on Wednesday, Powell noted that inflation remains very far from the Fed's target, though it may make sense to raise rates at a more moderate pace.

Powell, however, added that the fight against inflation still has a long way to go and despite a recent pause in interest rate hikes, officials agreed borrowing costs would likely need to move higher, which helps limit the downside for the USD. Apart from this, a more dovish stance adopted by the Bank of Japan (JPY) continues to undermine the Japanese Yen (JPY) and holds back bearish traders from placing aggressive bets around the USD/JPY pair.

It is worth recalling that the minutes of the April BoJ meeting showed on Wednesday that the nine-member board saw the need to keep ultra-low interest rates to support the fragile domestic economy. Adding to this, BoJ policymaker Seiji Adachi brushed aside expectations of an early tweak in the yield curve control policy and said that it was too early to phase out ultra-loose monetary policy due to uncertainty over the price outlook.

This marks a big divergence in comparison to the Fed projections for a higher peak interest rate this year and suggests that the path of least resistance for the USD/JPY pair is to the upside. Hence, any meaningful corrective decline is more likely to attract fresh buyers at lower levels and remain limited. Investors now look to Powell's second day of congressional testimony, which, along with the US macro data, might provide some impetus to the major.

Technical levels to watch