USD/JPY bounces off over one-week low, retakes 139.00 mark ahead of BoJ decision

• USD/JPY continues losing ground for the fifth straight day and drops to over a one-week low.
• Speculations of a tweak in the BoJ's YCC policy boost the JPY and exert pressure on the pair.
• The USD stands tall near a multi-week high and lends support ahead of the crucial BoJ decision.

The USD/JPY pair drifts lower for the fifth successive day and drops to a one-and-half-week low during the Asian session on Friday. Spot prices, however, manage to rebound a few pips in the last hour and climbs back above the 139.00 mark in the last hour as traders now look to the crucial Bank of Japan (BoJ) policy decision before placing fresh directional bets.

It is worth recalling that BoJ Governor Kazuo Ueda had reiterated that the central bank will stick to its accommodative monetary stance and added that the long-term yield rate remains stable under the yield curve control (YCC) policy. Investors, however, are still pricing in the possibility of a YCC tweak and the bets were lifted by stronger Tokyo CPI data for July, which remains above the BoJ's target. This, in turn, pushes the yield on the 10-year Japanese Government Bond (JGB) above the BoJ's tolerance band and underpins the Japanese Yen (JPY). Apart from this, a slight deterioration in the global risk sentiment benefits the JPY's safe-haven status and contributes to the offered tone surrounding the USD/JPY pair.

The US Dollar (USD), on the other hand, sticks to the overnight strong rally to over a two-week high touched in the aftermatch of the upbeat US macro data and lends support to the USD/JPY pair. The advance estimate released by the US Commerce Department showed that the world's largest economy grew by 2.4% annualized pace during the second quarter, beating expectations. Adding to this, the Initial Jobless Claims unexpectedly fell to 221K during the week ended July 22. This points to an extremely resilient US economy and increases the likelihood that the Federal Reserve (Fed) could further hike interest rates. In fact, the Fed on Wednesday left the door open for one more 25 bps lift-off in September or November.

Furthermore, Fed Chair Jerome Powell had said that the economy still needs to slow and the labour market to weaken for inflation to credibly return to the 2% target. This, in turn, favours the USD bulls and should help limit any further downside for the USD/JPY pair. Moreover, the aforementioned mixed fundamental backdrop might hold back traders on the sidelines heading into the key central bank event risk. Nevertheless, spot prices, at current levels, remain on track to register weekly losses, though hold comfortably above technically significant 100-day and 200-day Simple Moving Averages (SMAs).

Technical levels to watch