USD/JPY drops to fresh daily low, below 130.00 handle amid prevalent USD selling bias

The USD/JPY pair comes under some selling pressure on Tuesday and reverses a major part of the previous day's positive move, snapping a two-day winning streak. Spot prices remain on the defensive through the early European session and slip below the 130.00 psychological mark in the last hour. The US Dollar vs Yen has also reversed lower after touching a major channel line and although momentum to the downside is still relatively weak it's possible this may be the start of the next leg lower in the downtrend. 

The US Dollar struggles to capitalize on the overnight gains and meets with a fresh supply, which, in turn, is seen dragging the USD/JPY pair lower. The markets now seem convinced that the Federal Reserve will soften its hawkish stance amid signs of easing inflationary pressures and have been pricing in a smaller 25 bps rate hike in February. This keeps a lid on the recent recovery in the US Treasury bond yields and continues to act as a headwind for the Greenback.

The Japanese Yen (JPY), on the other hand, draws support from fresh speculation that high inflation may invite a more hawkish stance from the Bank of Japan (BoJ) later this year. The bets were lifted after the latest CPI report from Japan showed that consumer inflation rose to a 41-year high level of 4% in December. Apart from this, the cautious mood - amid worries about a deeper global economic downturn - benefits the safe-haven JPY and exerts pressure on the USD/JPY pair.

The downside, meanwhile, seems cushioned, at least for the time being, as traders might prefer to move to the sidelines ahead of the highly-anticipated FOMC meeting next week. In the meantime, traders will take cues from the US economic docket - featuring the release of the flash PMI prints and the Richmond Manufacturing Index.

The overall trend remains definitely bearish favoring short positions, however, the lack of impetus in the current pullback is worrying - it would be nice to see some stronger follow-through lower. A break below the January 23 lows (the last higher low) at circa 129.05, for example, would give the required green light to shorts, providing more confirmation the next leg down in the medium-term bear market for USD/JPY is underway.

Technical levels to watch