USD/JPY slips below 138.00 mark amid weaker USD, downside seems limited

• USD/JPY witnessed some selling for the second straight day amid modest USD weakness.
• The Fed-BoJ policy divergence, a positive risk tone to undermine the JPY and limit losses.
• Investors might also refrain from placing aggressive bets ahead of the BoJ on Thursday.

The USD/JPY pair edged lower for the second successive day on Monday and retreated further from a 24-year high, around the 139.35-139.40 area touched last week. The steady intraday descent extended through the early European session and dragged spot prices below the 138.00 round-figure mark.

A slew of influential FOMC members pushed back against market expectations for a supersized 100 bps rate hike move at the upcoming policy meeting on July 26-27. In fact, Fed Governor Christopher Waller and St. Louis Fed President Jim Bullard - the biggest Fed hawks - said last Thursday that they were not in favour of the bigger rate hike. Adding to this, Atlanta Fed President Raphael Bostic warned on Friday that moving too dramatically could undermine positive aspects of the economy and add to the uncertainty. This, in turn, prompted some US dollar profit-taking near a two-decade high, which extended through the first half of trading on Monday and exerted some downward pressure on the USD/JPY pair.

That said, a big divergence in the monetary policy stance adopted by the US central bank and Bank of Japan should act as a tailwind for spot prices. Apart from this, a generally positive tone around the equity markets could further undermine the safe-haven Japanese yen and help limit deeper losses for the USD/JPY pair, at least for the time being. Investors might also refrain from placing aggressive bets ahead of the latest BoJ monetary policy update during the latter part of this week. Nevertheless, the fundamental backdrop still seems tilted in favour of bullish traders and supports prospects for the emergence of some dip-buying at lower levels. This warrants some caution before positioning for any further losses.

Hence, it will be prudent to wait for strong follow-through selling before confirming that the pair has topped out in the near term. In the absence of any major market-moving US economic releases on Monday, the US bond yields will influence the USD price dynamics and provide some impetus to the USD/JPY pair. Apart from this, traders will take cues from the broader market risk sentiment to grab short-term opportunities.

Technical levels to watch