USD/JPY slides back closer to 138.00 mark amid weaker USD, cautious market mood

• USD/JPY meets with a fresh supply on Tuesday and is pressured by renewed USD selling bias.
• Bets that the Fed will soon end its rate-hiking cycle continue to undermine the Greenback.
• Speculations that the BoJ will tweak its YCC policy benefit the JPY and contribute to the fall.

The USD/JPY pair attracts some sellers in the vicinity of the 139.00 mark on Tuesday and extends its steady intraday descent through the early part of the European session. The pair drops to a fresh daily low, around the 138.20-138.15 region in the last hour and is pressured by a combination of factors.

The US Dollar (USD) continues with its struggle to register any meaningful recovery and languishes near its lowest level since April 2022 touched last Friday in the wake of expectations that the Federal Reserve (Fed) will soften its hawkish stance. The markets seem convinced that the US central bank will end its policy tightening campaign after the widely anticipated 25 bps lift-off at its upcoming policy meeting on July 25-26. This leads to a further decline in the US Treasury bond yields, which is seen weighing on the Greenback and dragging the USD/JPY pair lower.

The Japanese Yen (JPY), on the other hand, draws some support from speculations that the Bank of Japan (BoJ) could adjust its Yield Curve Control (YCC) policy in July. It is worth recalling, Japanese media reported that the BoJ is likely to raise its FY2023 inflation forecast, which has exceeded the 2% goal for more than a year. This should put pressure on the central bank to start unwinding its ultra-loose monetary policy settings. Apart from this, the prevalent cautious mood further benefits the safe-haven JPY and contributes to the offered tone surrounding the USD/JPY pair.

The market sentiment remains fragile on the back of growing worries about a global economic slowdown. The fears were fueled by weaker Chinese macro data released on Monday, which suggested that the post-COVID recovery is losing steam. In fact, the National Bureau of Statistics of China reported on Monday that the economic growth decelerated substantially in the second quarter and Retail sales - a gauge of consumption - slowed sharply in June. That said, the possibility of more stimulus measures from China helps limit the pessimism in the markets, at least for now.

Furthermore, doubts that the Fed will commit to a more dovish policy stance, instead might stick to its forecast for a 50 bps rate hike this year might hold back traders from placing aggressive bearish bets around the USD. This, in turn, warrants some caution before positioning for an extension of the USD/JPY pair's recent sharp retracement slide from the YTD peak - levels just above the 145.00 psychological mark - touched in June. Investors now look to the release of the US monthly Retail Sales and Industrial Production figures for short-term trading opportunities.

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