USD/JPY recovers modestly from daily lows and finds some support near 141.00

• USD/JPY comes under renewed selling pressure on Tuesday amid widespread dollar weakness.
• Bets on lower Fed rate hikes and falling US bond yields weigh on the dollar.
• Divergence between Fed and BOJ policies could undermine the yen and help limit any significant decline.

The pair USD/JPY It struggles to capitalize on the previous day’s breakout momentum beyond the 100-day SMA and runs into a fresh bid on Tuesday. The pair remains depressed during the first North American session, although it manages to bounce a few points from the vicinity of the 141.00 signal, or the daily low.

The US dollar comes under renewed selling pressure and halts its recent strong rally from the 3-month low, which in turn puts USD/JPY downward pressure. Investors now seem convinced that the Federal Reserve will slow the pace of its rate-raising cycle and have been pricing in a higher probability of a relatively minor 50 basis point hike in December. This has caused a further decline in US Treasury yields and keeps dollar bulls on the defensive.

That said, recent statements by several Fed officials suggest that the US central bank will continue to tighten monetary policy to curb inflation. By contrast, the Bank of Japan has so far shown no inclination to raise interest rates. Indeed, Bank of Japan Governor Haruhiko Kuroda reiterated on Friday that the central bank will continue its economically supportive monetary policy, adding that raising rates now would be inappropriate in light of current economic conditions.

This marks a large divergence in the monetary policy stance taken by the two major central banks, which could further undermine the Japanese yen. Apart from this, a slight recovery in global risk sentiment, which tends to dampen demand for traditional safe-haven currencies, including the JPY, could help limit losses for the USD/JPY pair. Also, investors would prefer to wait for a new catalyst from the FOMC Meeting Minutes, due to be released on Thursday.

Therefore, it will be prudent to wait for strong follow-up selling before confirming that the recent bounce from the low since August 29 has petered out. The Richmond US Manufacturing Index will be released next. This, along with Cleveland Fed President Loretta Mester’s scheduled speech, could influence USD price dynamics and allow traders to take advantage of short-term opportunities around the USD/JPY pair.

Technical levels to watch