USD/JPY remains under pressure below 146.00, focus on US PCE.

• USD/JPY finds new selling on Thursday and is weighed down by USD weakness.
• Expectations that the Fed will pause in September keep USD bulls on the defensive.
• The divergence between Fed and BoJ policies helps limit the pair’s losses ahead of the US PCE release.

The USD/JPY pair fails to capitalize on the previous day’s rebound from the 145.55 area, the weekly low, and comes under renewed selling pressure at the start of the European session on Thursday. The pair is trading just below the 146.00 round level, losing more than 0.30% on the day, and could fall further on a weaker tone around the US dollar (USD).

Indeed, the DXY dollar index, which measures the dollar’s strength against a basket of currencies, remains on the defensive, near a two-week low hit after disappointing macroeconomic data was released on Wednesday. The Automatic Data Processing (ADP) report showed that US private sector employment increased by 177,000 in August, compared with the 195,000 forecast and the downward revision of 324,000 the previous month. In addition, US GDP growth was revised downward to 2.1% annualized, compared to the 2.4% initially estimated, reinforcing expectations that the Federal Reserve (Fed) will interrupt its rate hike cycle in September.

This, in turn, caused a sharp drop in US Treasury yields overnight, which continues to weigh on the Dollar and USD/JPY. Markets, however, are still pricing in the possibility of a further 25 basis point Fed rate hike later this year. Instead, the BoJ is expected to maintain its ultra-easy monetary policy. This, in turn, could discourage traders from taking aggressive short positions around the pair. It should be recalled that BoJ Governor Kazuo Ueda stated last week that core inflation in Japan remains slightly below the 2% target, ensuring that the central bank could maintain the status quo until next summer.

Meanwhile, Japan’s Ministry of Economy, Trade and Industry reported that Industrial Production fell 2.0%m/m in July, versus market expectations for a 1.4% drop and 2.4% rise the previous month. However, this disappointment was largely offset by the release of Japanese retail sales data, which grew 6.8% yoy in July, up from 5.6% previously. However, these data have not served to boost USD/JPY as market attention remains focused on the release of the US Core PCE Price Index – the Fed’s preferred inflation gauge – and initial weekly claims for unemployment benefits, to be released later in the American session.

USD/JPY technical levels to watch