USD/JPY Outlook: Bullish potential remains intact, seems poised to surpass YTD top

• USD/JPY kicks off the new week on a softer note amid a modest USD weakness.
• US debt-ceiling woes and Jerome Powell’s less-hawkish remarks weigh on the Greenback.
• A combination of factors undermines the JPY and helps limit losses for the major.
• The fundamental backdrop supports prospects for a further appreciating move.

The USD/JPY pair edges lower for the second successive day on Monday, albeit shows some resilience below mid-137.00s and has now reversed a major part of the losses registered during the Asian session. A surprise breakdown in the US debt-ceiling negotiations raises doubts about a deal being reached soon and fears of an unprecedented American debt default. This, along with less hawkish remarks by Federal Reserve (Fed) Chair Jerome Powell, drags the US Dollar (USD) away from its highest level since March 20 set on Friday and acts as a headwind for the major.

Speaking at a Fed research conference, Powell said on Friday it is still unclear if interest rates will need to rise further amid uncertainty about the impact of past hikes and recent bank credit tightening. Powell reiterated that the central bank would now make decisions meeting by meeting and added that officials can afford to look at the data and the evolving outlook to make a careful assessment after a year of aggressive rate increases. Powell's preference to slow rate hikes triggers a fresh leg down in the US Treasury bond yields, which undermines the buck and weighs on the USD/JPY pair.

That said, a combination of supporting factors lends some support to the major and helps limit the downside, at least for the time being. A more dovish stance adopted by the Bank of Japan (BoJ), along with the optimism over a potential improvement in US-China relations, cap gains for the safe-haven Japanese Yen and assist the USD/JPY pair to attract some dip-buying at lower levels. Despite the hot Japanese National Core CPI report released on Friday, BoJ Governor Kazuo Ueda said that inflation is likely to slow back below the 2% target level in the middle of the current fiscal year.

Ueda further added that tightening monetary policy in response to this would hurt the economy and that the BoJ will continue easing with yield curve control. US President Joe Biden said during the Group of Seven (G7) summit in Japan that he expects relations between the US and Beijing to improve very shortly. Biden added that the G7 had also decided on a united approach to China. This makes it prudent to wait for strong follow-through selling before confirming that the USD/JPY pair has topped out and positioning for any meaningful corrective slide from the YTD peak touched on Friday.

There isn't any relevant market-moving economic data due for release from the US on Monday. Hence, the focus will remain glued to a key meeting between President Joe Biden and House Republican Speaker Kevin McCarthy to discuss the debt ceiling. Apart from this, the US bond yields will influence the USD price dynamics. Traders will further take cues from the broader risk sentiment to grab short-term opportunities around the USD/JPY pair. The market attention will then shift to the flash US Purchasing Managers Index (PMI) prints on Tuesday and the crucial FOMC meeting minutes on Wednesday.

Technical Outlook

From a technical perspective, last week's sustained breakout through the very important 200-day Simple Moving Average (SMA) and the previous YTD peak was seen as a fresh trigger for bullish traders. The emergence of some dip-buying on Monday adds credence to the positive outlook, which, along with bullish oscillators on the daily chart, support prospects for a further near-term appreciating move. Hence, a move back towards retesting the YTD peak, around the 138.70 region, looks like a distinct possibility. This is closely followed by the 139.00 round figure, above which the USD/JPY pair could surpass the 139.40 an intermediate hurdle and aim to reclaim the 140.00 psychological mark.

On the flip side, weakness below the Asian session low, around the 137.50-137.45 region, is likely to find decent support near the 137.10 area (200-day SMA). A convincing break below could prompt some technical selling and drag the USD/JPY pair to sub-136.00 levels. The downside trajectory could get extended further towards the next relevant support near the 135.25-135.20 region en route to the 135.00 psychological mark before spot prices eventually drop to the 134.40 horizontal zone.