USD/JPY Outlook: Corrective slide might be seen as a buying opportunity, 145.00 holds the key

The USD/JPY pair extends the overnight retracement slide from the 146.55 area, or its highest level since November 2022 and drifts lower for the second successive day on Friday. Retreating US Treasury bond yields drags the US Dollar (USD) away from over a two-month high touched on Thursday, which, in turn, is seen as a key factor exerting pressure on the major. In fact, the yield on the benchmark 10-year US government bond corrects sharply from a 10-month peak touched the previous day. This results in the narrowing of the US-Japan rate differential, which, along with intervention fears and a generally weaker risk tone, drives some haven flows towards the Japanese Yen (JPY) and contributes to the offered tone.

It is worth recalling that Japan's top forex diplomat Masato Kanda said on Tuesday that he would take appropriate steps against excessive currency moves. Meanwhile, China Evergrande Group – one of the country's biggest real estate developers – filed for protection from creditors in a US bankruptcy court on Thursday. The news adds to concerns about a deepening crisis in China's property sector and the worsening conditions in the world's second-largest economy. This, in turn, forces investors to take refuge in traditional safe-haven assets and benefits the JPY. However, talks of additional Chinese stimulus measures help limit the pessimism, which, along with the Bank of Japan's (BoJ) dovish stance, might cap gains for the JPY.

It is worth recalling that BoJ is the only major central bank in the world to maintain negative interest rates and is expected to stick to its dovish stance. The bets were reaffirmed by the fact that Japan's core consumer prices slowed to the 3.1% YoY rate in July from 3.3% in the previous month. Additional details of the report, meanwhile, showed that the core figure, which excludes both fresh food and energy costs, climbed to 4.3% over the past twelve months through July and remains close to over a 40-year peak. Nevertheless, the data suggests that the BoJ will be in no rush to phase out monetary easing. The central bank argues that wage pressures have yet to build up enough to warrant a fresh tweak to the ultra-loose monetary policy.

This marks a big divergence in comparison to other major central banks, including the Federal Reserve (Fed), and should help limit any meaningful downside for the USD/JPY pair, at least for the time being. The minutes of the July 25-26 FOMC meeting released on Wednesday revealed that policymakers continued to prioritize the battle against inflation, though were divided over the need for more rate hikes. Moreover, the latest US CPI and the PPI reports released last week suggested that the battle to bring inflation back to the Fed's 2% target is far from being won. Adding to this, the incoming stronger US macro data points to an extremely resilient economy and keeps the door open for one more 25 bps lift-off later this year.

In the absence of any relevant market-moving economic releases from the US, the aforementioned fundamental backdrop warrants some caution before confirming that the USD/JPY pair topped out in the near term. Traders might also refrain from placing aggressive bets ahead of the crucial Jackson Hole Symposium next week, where comments by central bankers might infuse significant volatility in the markets and provide some meaningful impetus. In the meantime, the US bond yields will continue to play a key role in influencing the USD price dynamics. Apart from this, the broader risk sentiment might further contribute to producing short-term trading opportunities on the last day of the week.

Technical Outlook

From a technical perspective, the intraday downfall shows some resilience below the 23.6% Fibonacci retracement level of the recent rally from the monthly low and warrants some caution for bearish traders. Moreover, oscillators on the daily chart are holding comfortably in the bullish territory and support prospects for the emergence of some dip-buying around the USD/JPY pair.

Hence, any subsequent slide is more likely to find decent support and be bought into around the 145.00 psychological mark. This, in turn, should help limit losses near the 144.80 region, representing the 200-hour Simple Moving Average (SMA), which is closely followed by the 144.60 area, or the 38.2% Fibo. level. Failure to defend the said support levels might negate the positive outlook and prompt fresh selling, paving the way for a deeper corrective decline.

On the flip side, any recovery back above the 145.50-145.55 area now seems to confront resistance just ahead of the 146.00 round-figure mark. Some follow-through buying has the potential to lift the USD/JPY pair back towards the YTD peak, around the 146.55 region. The subsequent move-up should allow bulls to aim to reclaim the 147.00 mark and then aim to test the next relevant hurdle near mid-147.00s.