USD/JPY falls below 132.50

• USD/JPY moves lower for the second day in a row on Thursday amid fresh dollar selling.
• Diminishing odds of a further Fed rate hike in September continue to weigh on the dollar.
• The divergence between the monetary policies of the Fed and the Bank of Japan and risk appetite could weigh on the safe-haven JPY.
• A convincing break below the post low of the US CPI is needed to confirm a further breakout.

The pair USD/JPY pulls back nearly 90 pips from daily highs and falls to a new daily low during the first half of the European session on Thursday. The pair stands currently below 132.50still well above the one and a half week low hit the day before.

The US dollar struggling to retain modest gains intraday recovery and encounters new sales which, in turn, put some downward pressure on the USD/JPY pair. Lower-than-expected US inflation figures released on Wednesday forced investors to cut their expectations for a more aggressive tightening of the Fed’s monetary policy. Aside from this, a modest decline in US Treasury yields continues to weigh on the dollar.

However still the Fed is expected to raise interest rates by at least 50 basis points at the September monetary policy meeting. In contrast, the Bank of Japan has repeatedly stated that it will maintain its ultra-loose monetary policy. The resulting divergence between the monetary policy of the Fed and the Bank of Japancoupled with a positive tone around equity markets, could weigh on the safe-haven Japanese yen and offer support to the USD/JPY pair.

From the technical point of view, the previous day’s rejection from the 50-day SMA a new trigger was considered. That said, it would be wise to wait for a convincing break below the 132.00 level, or the post US CPI low, before positioning for another move lower. On the other hand, the daily high around the 133.30 area could act as a strong immediate headwind for the USD/JPY pair, at least for now.

Market participants now await the US economic calendar, with the release of the Producer Price Index (PPI) later at the start of the American session. This, coupled with US bond yields, could influence dollar price dynamics and give the USD/JPY pair some momentum. Additionally, investors will be guided by the broader market risk sentiment to take advantage of some short-term opportunities around the pair.

USD/JPY technical levels