USD/JPY retreats from 38-year peak, downside potential seems limited

• USD/JPY bulls opt to take some profits off the table amid intervention fears.
• The upbeat Japanese Retail Sales underpin the JPY and also exert pressure.
• The divergent BoJ-Fed policy could limit losses ahead of the US macro data.

The USD/JPY pair drifts lower during the Asian session on Thursday and erodes a part of the previous day's strong gains to the 160.85-160.90 region, or its highest level since 1986. Spot prices currently trade around mid-160.00s, though any meaningful corrective decline seems elusive in the wake of a big US-Japan interest rate differential. 

The Bank of Japan (BoJ) has been reluctant to provide a detailed plan for the reduction of bond purchases. In contrast, the recent hawkish comments from Federal Reserve (Fed) officials suggested that the US central bank is in no rush to start its rate-cutting cycle amid a still resilient economy. This, along with the underlying bullish tone across the global equity markets, might continue to undermine the safe-haven Japanese Yen (JPY) and act as a tailwind for the USD/JPY pair, warranting some caution for aggressive bearish traders. 

Investors, meanwhile, remain on alert amid speculations that Japanese authorities might intervene in the markets to prop up the domestic currency. In fact, Japan's Vice Finance Minister Masato Kanda reiterated that the government is prepared to take appropriate action if excessive currency fluctuations have a negative impact on the national economy. Adding to this, the upbeat Retail Sales data from Japan, which grew by the 3% YoY rate in May, lends some support to the JPY and prompts some profit-taking around the USD/JPY pair. 

Traders now look to the US economic docket – featuring the release of the final Q1 GDP print, Durable Goods Orders, the usual Initial Weekly Jobless Claims and Pending Home Sales. This, along with the US Treasury bond yields, will influence the USD and drive the USD/JPY pair ahead of the Tokyo Core CPI on Friday. The focus, however, will remain glued to the US Personal Consumption Expenditures (PCE) Price Index, which is considered the Fed's preferred inflation gauge and should provide a fresh impetus to the currency pair.

Levels to watch

Any subsequent slide is likely to attract some buying near the 160.00 psychological mark. This is followed by the 159.75 horizontal resistance breakpoint, now turned support, below which the USD/JPY pair could extend the corrective decline further towards the 159.00 round-figure mark. On the flip side, the multi-decade high, around the 160.85-160.90 region, could act as an immediate barrier. Some follow-through buying beyond the 161.00 mark will be seen as a fresh trigger for bullish traders and set the stage for an extension of a well-established uptrend.