USD/JPY Remains On The Defensive Near 144.00, With Downside Potential Limited Advance Of US NFP Data

The USD/JPY pair attracts sellers for a second consecutive day on Friday and remains on the defensive near the 144.00 level throughout the Asian trading session. Spot prices, however, manage to hold above a one-and-a-half-week low, which was reached around 143.55 on Thursday, and a meaningful corrective decline remains elusive.

Concerns regarding economic headwinds resulting from rapidly rising borrowing costs and deteriorating US-China relations continue to impact on investor sentiment, as evidenced by a generally gloomier tone on the equity markets. Aside from this, the potential danger of intervention by Japanese authorities supports the safe-haven Japanese Yen (JPY) and exerts some pressure on the USD/JPY exchange rate. On the other hand, the US Dollar (USD) halts the overnight retracement decline from its highest level since June 12. In addition, a significant divergence between the monetary policy stances of the Bank of Japan (BoJ) and the Federal Reserve (Fed) should help limit the downside for the major currency pair, at least for the time being.

Investors appear confident that the Bank of Japan's negative interest rate policy will continue at least through next year. In addition, as reported by the Nikkei newspaper on Friday, BoJ Deputy Governor Shinichi Uchida stated that the BoJ will maintain its yield curve control (YCC) policy in order to sustain ultra-loose monetary conditions. This, in turn, dampens rumours of a change in the BoJ's policy outlook, which were fueled by data indicating that Japan's nominal base compensation grew at its fastest rate in 28 years in May. This could increase inflation, which has exceeded the 2% target for over a year. In contrast, it is widely anticipated that the Fed will increase interest rates by 25 basis points at its impending policy meeting on July 25-26.

The optimistic US ADP report published on Thursday showed that private-sector employers added 497K jobs in June, significantly more than the 267K seen in May and exceeding even the most optimistic forecasts. The US ISM Services PMI increased more than anticipated in June, rising to 53.9 from 50.3 the previous month. However, the Prices Paid sub-component, a measure of inflation, fell to more than three-year lows. Nonetheless, the reports largely overshadowed data indicating that Weekly Initial Jobless Claims rose more than expected, to 248K last week from 236K, and that JOLTS Job Opening for May fell short of expectations.

The aforementioned fundamental environment appears to be heavily weighted in favour of USD bulls and supports the likelihood of USD/JPY dip purchasing. However, traders appear hesitant and prefer to wait on the sidelines until Friday's publication of the closely-watched US employment report. The well-known NFP report is due later during the early North American session, which will have a significant impact on the USD price dynamics and allow traders to take advantage of short-term opportunities on Friday.