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On Wednesday, the USD/JPY pair extends its recent sharp retracement decline from the yearly high - levels just above the 145.00 psychological mark - and loses ground for the fifth consecutive day. During the Asian session, spot prices fell to a nearly one-month low and are currently trading just above the 139.50 level, down nearly 0.50% on the day.

The Japanese Yen (JPY) remains supported by rumours that the Bank of Japan (BOJ) will alter its ultra-loose policy settings as early as this month, which has pushed up the yields on Japanese government bonds (JGB). This week, the yield on the benchmark 10-year JGB reached its greatest level since April. Together with the recent decline in US Treasury bond yields, this narrows the US-Japan rate differential and further contributes to the JPY's strength. In addition, the prevalent US Dollar (USD) selling bias is seen as exerting downward pressure on the USD/JPY exchange rate.

In fact, the USD Index (DXY), which tracks the Greenback versus a basket of currencies, reaches a new two-month low in the wake of growing expectations that the Federal Reserve (Fed) has limited room to continue raising interest rates. Several Fed officials stated on Monday that the US central bank would likely tighten monetary policy further to reduce inflation, despite the fact that the end of its current rate-hiking cycle was near. The bets were validated by the New York Fed's monthly survey published on Monday, which revealed that the one-year consumer inflation expectation fell to 3.8% in June, the lowest level since April 2021.

The aforementioned fundamental environment suggests that the USD/JPY pair's path of least resistance remains to the downside. Ahead of the publication of the latest US consumer inflation figures, expected later during the early North American session, traders may choose to refrain from placing aggressive trades and wait on the sidelines. A further deceleration in price growth is more likely to spur fresh USD sales, paving the way for a further near-term depreciation of the major currency. Any positive surprise, on the other hand, could prompt aggressive short-covering around the dollar and the major.

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