USD/JPY Outlook: 137.50 is the last defense for bulls and crucial for meaningful bounce

• USD/JPY edges lower for the second straight day amid the emergence of fresh USD selling.
• Rising bets for less aggressive Fed rate hikes continue to act as a headwind for the buck.
• A modest recovery in the risk sentiment undermines the safe-haven JPY and lends support.

The USD/JPY pair struggles to capitalize on the previous day's late recovery from the 137.50 area, or a three-month low and attracts fresh sellers during the Asian session on Tuesday. The US Dollar comes under renewed selling pressure amid growing acceptance that the Fed will slow the pace of its policy tightening and turns out to be a key factor acting as a headwind for the major. In fact, the November FOMC meeting minutes released last week reinforced market bets for a relatively smaller 50 bps rate hike in December. This, to a larger extent, overshadows the overnight hawkish remarks by Fed officials and keeps the USD bulls on the defensive.

The Japanese Yen, on the other hand, draws support from a Reuters poll, indicating that more than 90% of economists expect that The Bank of Japan's (BoJ) next policy move will be to unwind its massive monetary easing. The change in the stance, however, is not anticipated before the latter half of 2023. Moreover, BoJ Governor Haruhiko Kuroda had said earlier this month that the central bank will stick to its monetary easing to support the economy and achieve the 2% inflation target in a stable fashion. This, along with disappointing domestic data and a modest uptick in the risk sentiment, could undermine the safe-haven JPY and limit losses for the USD/JPY pair.

Nevertheless, spot prices trade in the negative territory for the second successive day and remain at the mercy of the USD price dynamics. Market participants now look forward to the Conference Board's US Consumer Confidence Index, due for release later during the early North American session. Apart from this, traders will take cues from the broader market risk sentiment to grab short-term opportunities around the USD/JPY pair. The focus, however, will be on Fed Chair Jerome Powell's speech on Wednesday and this week's important US data, including the NFP report on Friday. This will drive the USD and provide a fresh directional impetus to the major.

Technical Outlook

From a technical perspective, repeated failures to find acceptance below the 138.00 mark warrant some caution for bearish traders. Hence, it will be prudent to wait for some follow-through selling below the overnight swing low, around mid-137.00s, before positioning for an extension of the recent sharp pullback from a 32-year high touched in October. The USD/JPY pair might then turn vulnerable to weaken further below the 137.00 mark and test the next relevant support around the 136.70-136.65 region. Spot prices could eventually drop to the 136.20-136.15 area, en route to the 1.3600 round figure and the 135.80 support zone.

On the flip side, the 139.00 mark is likely to act as an immediate strong resistance ahead of the 139.40-139.60 supply zone. A sustained strength beyond the latter will trigger a short-covering rally and lift the USD/JPY pair beyond the 140.00 psychological mark, towards the 140.30-140.40 barrier. The momentum could further get extended towards the 141.00 mark en route to the 100-day SMA breakpoint, around the 141.15-141.20 region. The latter should act as a pivotal point for short-term traders, which if cleared decisively will negate any bearish bias and pave the way for some meaningful appreciating move.