USD/JPY Analysis: Bullish flag pattern is in the making ahead of US ADP report, ISM PMI

• USD/JPY attracts fresh buying on Thursday, stopping a three-day downtrend.
• A pickup in US bond yields underpins the USD and remains supportive.
• Reduced bets for a 25 bps Fed rate hike and Yen intervention warnings are likely to cap gains.
• Traders look to important US macro releases for some meaningful impetus.

The USD/JPY pair reverses an Asian session dip to sub-139.00 levels, recovering somewhat from this week's slide from the vicinity of the 141.00 mark, or a six-month high. Following the previous day's modest pullback from its highest level since mid-March, the US Dollar (USD) regains some positive traction on Thursday and turns out to be a key factor acting as a tailwind for the major. A  pickup in the US Treasury bond yields offers some support to the buck, though reduced bets for another rate hike by the Federal Reserve (Fed) might cap gains for the Greenback.

Fed Governor Philip Jefferson said in a speech on Wednesday that pausing rate hikes at the next FOMC meeting would give time to analyse more data before making a decision about the extent of additional tightening. He added that a pause does not mean that rates have peaked. Separately, Philadelphia Fed President Patrick Harker favoured pausing at the next meeting, though warned that incoming data may change his mind. This, in turn, forced investors to scale back their expectations for a 25 bps lift-off at the upcoming FOMC monetary policy meeting later this month.

This, along with the prospect of Japanese authorities intervening in the markets, could lend support to the Japanese Yen (JPY) and contributes to keep a lid on the USD/JPY pair. In fact, Japan’s Vice Finance Minister for international affairs Masato Kanda hinted on Wednesday that authorities may act to support the sinking Yen, saying that they will closely watch currency market moves and respond appropriately as needed. He added that they won't rule out every option available. This, in turn, warrants some caution before positioning for any further appreciating move for the major.

Meanwhile, worries about a global economic slowdown offset progress towards averting an unprecedented US debt default, which might benefit the safe-haven JPY and further contribute to keep a lid on the USD/JPY pair. In fact, the US House of Representatives voted in favour of a bill over the debt ceiling late Wednesday, pushing it forward to the Senate as the June 5 deadline for a US default approaches. This might further hold back bulls from placing aggressive bets around the major as market participants look to US macro data for some meaningful impetus.

Thursday's US economic docket features the release of the ADP report on private-sector employment, the usual Weekly Initial Jobless Claims data and the ISM Manufacturing PMI, due the early North American session. Apart from this, Fedspeaks and the US bond yields will influence the USD price dynamics. Traders will further take cues from the broader risk sentiment, which tends to drive demand for safe-haven assets, to grab short-term opportunities around the USD/JPY pair.

Technical Outlook

From a technical perspective, the downfall witnessed over the past few trading sessions has been along a downward-sloping channel. Against the backdrop of the recent rally from the May monthly swing low, the channel constitutes the formation of a bullish flag pattern on hourly charts. This, along with positive oscillators, suggests that the path of least resistance for the USD/JPY pair is to the upside. Traders, however, need to wait for a sustained breakout through the channel resistance, currently pegged just ahead of the 140.00 psychological mark, before positioning for any further appreciating move. Spot prices might then aim to retest the YTD peak, just ahead of the 141.00 round figure, with some intermediate hurdle near the overnight swing high, around the 139.40 region.

On the flip side, the 139.35-139.30 area seems to protect the immediate downside ahead of the daily low, around the 139.00 mark. This is closely followed by the trend-channel support around the 138.80-138.75 region, which if broken will negate the constructive setup and prompt some technical selling. The subsequent downfall could drag the USD/JPY pair towards the 138.40-138.30 horizontal support en route to the 138.00 mark and the 100-day Simple Moving Average (SMA), around the 137.85-137.80 zone.