USD/JPY Forecast: 50% Fibo./monthly low/50-DMA confluence holds the key for bulls

• USD/JPY remained depressed below the 127.00 mark amid the prevalent USD selling bias.
• The risk-on impulse undermined the safe-haven JPY and helped limit any further losses.
• The Fed-BoJ policy divergence supports prospects for the emergence of some dip-buying.

The USD/JPY pair struggled to capitalize on the overnight late rebound and met with a fresh supply during the Asian session on Friday. The downtick dragged spot prices to the lower end of a three-day-old trading range and was sponsored by the prevalent US dollar selling bias.

Minutes from the May 3-4 FOMC meeting released on Wednesday suggested that the Fed could pause the rate hike cycle after two 50 bps hikes each in June and July amid the worsening economic outlook. The speculations were further fueled by Thursday's release of the Prelim US GDP report, which showed that the world's largest economy contracted by a 1.5% annualized pace in the first quarter. This, along with the recent decline in the US Treasury bond yields to a six-week low, dragged the USD to a fresh one-month low and exerted some downward pressure on the USD/JPY pair.

That said, the risk-on impulse - as depicted by strong rally in the global equity markets - undermined the safe-haven Japanese yen and offered support to the major. Apart from this, a big divergence in the monetary policy stance adopted by the Fed (hawkish) and the Bank of Japan (dovish) should help limit deeper losses for the USD/JPY pair, at least for now. It is worth recalling that the BoJ has vowed to keep its existing ultra-loose policy settings and promised to conduct unlimited bond purchase operations to defend its near-zero target for 10-year yields.

The fundamental backdrop supports prospects for the emergence of some buying at lower levels and warrants caution before placing aggressive bearish bets around the USD/JPY pair. Market participants now look forward to the release of the US Core PCE Price Index - the Fed's preferred inflation gauge - for some impetus later during the early North American session. This, along with the US bond yields will influence the USD price dynamics. Apart from this, traders will take cues from the broader market risk sentiment to grab short-term opportunities on the last day of the week.

Technical outlook

From a technical perspective, the pair has been oscillating in a narrow trading band over the past three trading sessions. Bulls, so far, have struggled to lift spot prices back above the 38.2% Fibonacci retracement level of the 121.28-131.35 rally. The pair, however, has managed to hold its neck above the monthly low, around the 126.35 region, which coincides with the 50% Fibo. level and 50-day SMA confluence. A convincing break below the latter will set the stage for an extension of the recent sharp pullback from a two-decade high, around the 131.35 area touched earlier this month.

The USD/JPY pair might then weaken further below the 126.00 round figure and accelerate the slide to test the 125.65 support, representing the lower end of a three-week-old descending channel. Some follow-through selling would expose the 61.8% Fibo. level, around the 125.00 psychological mark, which if broken decisively might be seen as a fresh trigger for bearish traders and prompt aggressive technical selling.

On the flip side, the 38.2% Fibo. level, around the 127.45-127.55 region, now seems to have emerged as an immediate strong barrier. A convincing breakthrough should allow bulls to reclaim the 128.00 round-figure mark. Some follow-through buying has the potential to lift the USD/JPY pair towards the trend-channel resistance, around mid-128.00s, which if cleared will negate any near-term negative bias. The next relevant hurdle is pegged near the 23.6% Fibo. level, just ahead of the 129.00 mark, above which the pair could aim for the 130.00 psychological mark with intermediate resistance near the 129.60-129.70 region.