USD/JPY recovers early lost ground, intervention fears cap the upside amid retreating USD

• USD/JPY attracts fresh buying following the release of the final GDP report from Japan.
• Intervention fears hold back bulls from placing fresh bets amid a modest USD downfall.
• The Fed-BoJ policy divergence suggests that the path of least resistance is to the upside.

The USD/JPY pair reverses an Asian session slide to the 146.60-146.55 region, representing the 200-hour Simple Moving Average (SMA) and climbs to a fresh daily high in the last hour. Spot prices currently trade around the 147.25-147.20 area, nearly unchanged for the day, and for now, seem to have stalled this week's corrective pullback from the highest level since November 2022.

The Japanese Yen (JPY) weakens across the board in reaction to a downward revision of the second quarter GDP growth and turns out to be a key factor that assists the USD/JPY pair to attract some dip-buying on the last day of the week. In fact, the world's third-largest economy expanded by a 4.8% annualized pace during the April-June period, down from the preliminary estimate of 6.0%. The data underscores the fragile state of Japan's economy and ensures that the Bank of Japan (BoJ) will stick to its ultra-loose monetary policy settings.

This, along with signs of stability in the equity markets, undermines the JPY's safe-haven status and lends support to the USD/JPY pair. That said, speculations that Japanese authorities will intervene in the foreign exchange market to lift the domestic currency should limit losses for the JPY. In fact, BoJ board member Junko Nakagawa said that the FX moves should reflect economic, and financial fundamentals and move stably. Apart from this, a modest US Dollar (USD) pullback from a six-month peak contributes to capping gains for the major.

The sentiment surrounding the USD, meanwhile, remains bullish in the wake of growing acceptance that the Federal Reserve (Fed) will keep rates higher for longer and bets for one more 25 bps lift-off in 2023. This marks a big divergence in comparison to a dovish stance adopted by the BoJ and suggests that the path of least resistance for the USD/JPY is to the upside. Hence, any meaningful corrective decline might still be seen as a buying opportunity and is more likely to remain limited in the absence of any relevant data from the US on Friday.

Technical levels to watch