The USD/JPY pair is experiencing a downward correction after reaching a two-week high on Thursday, maintaining a bearish tone during the early European session. Currently trading around the mid-137.00s, the spot prices have snapped a five-day winning streak, showing a decline of approximately 0.15% for the day.

The intraday decline lacks a clear fundamental catalyst and appears to be driven primarily by profit-taking following the recent rally of around 400 pips witnessed over the past week. Despite this correction, several factors are still supporting the USD/JPY pair and acting as a headwind, urging caution among aggressive bearish traders.

The US Dollar (USD) remains strong, nearing its highest level since March 24, bolstered by speculations that the Federal Reserve (Fed) will maintain higher interest rates for an extended period. This expectation stems from the recent hawkish comments made by multiple Fed policymakers, leading investors to reduce their bets on interest rate cuts during the latter half of the year.

Additionally, there is optimism that the US debt ceiling will be raised, further supporting elevated US Treasury bond yields and reinforcing the strength of the Greenback. President Joe Biden and top congressional Republican Kevin McCarthy have expressed their commitment to reaching a deal soon to raise the government’s $31.4 trillion debt ceiling.

Conversely, the Japanese Yen (JPY) is likely to be weakened by the Bank of Japan’s (BoJ) more dovish stance. Furthermore, Japan’s export growth has sharply decelerated to its slowest pace in over two years in April, which may help limit losses for the USD/JPY pair and encourage dip-buying.

Considering the aforementioned fundamental factors, the prevailing path for spot prices appears to be towards the upside. Market participants are eagerly awaiting the release of various US economic indicators during the early North American session, including the Weekly Initial Jobless Claims, the Philly Fed Manufacturing Index, and Existing Home Sales data.

Moreover, speeches by influential members of the Federal Open Market Committee (FOMC) and movements in US bond yields will influence USD demand and potentially provide momentum to the USD/JPY pair. Short-term trading opportunities will also be influenced by developments surrounding the US debt-limit negotiations and the broader risk sentiment.


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