USD/JPY remains on the defensive around 144.00, downside seems limited ahead of US NFP

• USD/JPY edges lower for the second straight day, though lacks follow-through selling.
• The risk-off mood, along with intervention fears, benefit the JPY and act as a headwind.
• The Fed-BoJ policy divergence helps limit the downside ahead of the key US NFP report.

The USD/JPY pair attracts some sellers for the second successive day on Friday and remains on the defensive around the 144.00 mark through the Asian session. Spot prices, however, manage to hold above a one-and-half-week low, around the 143.55 area touched on Thursday, and any meaningful corrective decline still seems elusive.

Worries about economic headwinds stemming from rapidly rising borrowing costs, along the worsening US-China relations, continue to weigh on investors’ sentiment, which is evident from a generally weaker tone around the equity markets. Apart from this, the potential risk of intervention by Japanese authorities lends some support to the safe-haven Japanese Yen (JPY) and exerts some pressure on the USD/JPY pair. The US Dollar (USD), on the other hand, stalls the overnight retracement slide from its higehst level since June 12. Furthermore, a big divergence in the monetary policy stance adopted by the Bank of Japan (BoJ) and the Federal Reserve (Fed) should help limit the downside for the major, at least for the time being.

Investors seem convinced that BoJ’s negative interest-rate policy will remain in place at least until next year. Adding to this, BoJ Deputy Governor Shinichi Uchida, as reported by the Nikkei newspaper on Friday, said the BoJ will maintain its yield curve control (YCC) policy from the perspective of sustaining ultra-loose monetary conditions. This, in turn, pours cold water on speculations about any change in the BoJ’s policy outlook, fueled by data that Japan’s nominal base salary grew at the fastest pace in 28 years in May. This could push inflation higher, which has exceeded the 2% goal for more than a year. In contrast, the Fed is widely expected to hike interest rates by 25 bps at its upcoming policy meeting on July 25-26.

The bets were reaffirmed by the upbeat US ADP report released on Thursday, which showed that private-sector employers added  497K jobs in June, well above the 267K seen a month earlier and smashing even the most optimistic estimates. In a sign of further economic strength, the US ISM Serices PMI increased more than expected, to 53.9 in June from 50.3 in the previous month, though the Prices Paid sub-component – a gauge of inflation – fell to more than three-year lows. Nevertheless, the reports, to a larger extent, overshadowed data showing Weekly Initial Jobless Claims rose more than anticipated, to 248K last week from 236K and JOLTS Job Opening for May missed expectations.

The aforementioned fundamental backdrop seems tilted firmly in favour of the USD bulls and supports prospects for the emergence of some dip-buying around the USD/JPY pair. Traders, however, seem reluctant and prefer to wait on the sidelines ahead of Friday’s release of the closely-watched US monthly employment details. The popularly known NFP report is due later during the early North American session, which will play a key role in influencing the USD price dynamics and allow traders to grab short-term opportunities on the last day of the week.

Technical levels to watch