USD/JPY trades with modest losses below mid-144.00s amid intervention fears, softer risk tone

• USD/JPY once again fails ahead of the 145.00 mark and meets with a fresh supply on Thursday.
• Intervention fears, along with a softer risk tone, benefit the safe-haven JPY and exert pressure.
• The BoJ-Fed policy divergence favours bullish traders and should help limit any further losses.

The USD/JPY pair struggles to capitalize on the previous day's goodish bounce of nearly 70 pips from the 144.00 neighbourhood and meets with a fresh supply during the Asian session on Thursday. Spot prices currently trade around the 144.35 region, down 0.35% for the day, though remain well within a familiar band held over the past one-and-half-week or so.

The potential risk of intervention by Japanese authorities above the 145.00 psychological mark, along with a weaker tone around the equity markets, benefits the Japanese Yen (JPY) and exerts pressure on the USD/JPY pair. Against the backdrop of worries about a global economic downturn, the worsening US-China relations turn out to be a key factor weighing on investors' sentiment. In fact, China introduced export curbs on two metals - widely used in semiconductors, electric vehicles and high-tech industries - to the US, which is viewed as a response to efforts by the US to curtail China's technological advancements. This marks a potential escalation in a trade conflict between the world’s largest economies and might cause more disruption to global trade. This, in turn, could further undermine already weak economic conditions and takes its toll on the risk sentiment.

That said, a more dovish stance adopted by the Bank of Japan (BoJ) might keep a lid on any meaningful gains for the JPY and help limit the downside for the USD/JPY pair, 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. Moreover, BoJ Governor Kazuo Ueda, despite the fact that inflation in Japan has exceeded the 2% goal for more than a year, ruled out the possibility of any change in ultra-loose policy settings and signalled no immediate plans to alter the yield curve control measures. This marks a big divergence in comparison to the Federal Reserve's (Fed) hawkish outlook, indicating a greater likelihood of further policy tightening to combat inflation.

In fact, minutes from the June FOMC policy meeting released on Wednesday showed that almost all members supported resuming rate hikes at a future meeting as inflation remains unacceptably high. Furthermore, some members were in favour of raising rates rather than pausing at the June meeting flagging a very tight labor market, which threatens to push wages and inflation higher. This, in turn, reaffirms market expectations for a 25 bps lift-off at the upcoming FOMC meeting on July 25-26 and led to the overnight sharp rally in the US Treasury bond yields, which, in turn, acts as a tailwind for the US Dollar (USD). Hence, any meaningful corrective decline for the USD/JPY pair is likely to get bought into and remain limited.

Market participants now look to Thursday's US economic docket, featuring the release of the ADP report on private-sector employment, the usual Weekly Initial Jobless Claims, the ISM Services PMI and JOLTS Job Openings data. Apart from this, the US bond yields, will influence the USD price dynamics and provide some impetus to the USD/JPY pair. The focus, however, will remain glued to the closely-watched US monthly employment details, popularly known as the NFP report on Friday. This should play a key role in driving the near-term USD demand and help determine the next leg of a directional move for the major.

Technical levels to watch