USD/JPY Snaps Three-Day Winning Streak Amid Stronger U.S. Dollar, US CPI Data Awaited

• USD/JPY cross attracted some selling during the mid-Asian session and managed to move back to the early 135.000s
• A combination of factors underpins the greenback and helps cap the USD/JPY against the further uptick
• Dovish BOJ monetary policy minutes plus a fresh batch of disappointing Japan macroeconomic data are a headwind to the Yen
• Investors' focus remains on Wednesday's CPI inflation data, expected to show rising inflation pressures in the U.S

USD/JPY pair struggled to capitalize on the overnight bounce from the vicinity of the 134.708 level and attracted fresh selling on Tuesday during the second part of the Asian session. As per press time, the pair is still 0.12% up for the day but has managed to reverse back part of its earlier gains and was last seen trading in losses near early-135.000s heading into the European session.

A combination of factors assisted the greenback in attracting some intraday buying on Tuesday and saw the U.S. Dollar index (DXY) extend its solid bullish momentum above 101.450 on Tuesday, marking the second successive day of substantial gains and, in turn, acting as a headwind for the USD/JPY pair. Speculation that the Fed is less likely to halt its aggressive tightening campaign amid stronger-than-expected job growth figures in April supported the strong rally in treasury bond yields. Additionally, incoming data on Wednesday is expected to show sticky inflation in the U.S., which should further cement market bets that the FED will likely not stop its monetary policy hiking campaign as soon as the markets initially believed.

Apart from this, renewed concerns about the U.S. banking sector after another regional bank in the U.S. - PACWest BankCorp, shares nosedived after announcing after the market close last week on Wednesday that it was considering its options for raising new capital as well as considering the sale of the business—sent shivers across the banking sector about the return of another banking sector crisis after the collapse of SVB and Signature Bank, followed by a downturn in Credit Suisse and First Republic. This, in turn, saw investors further favor traditional safe-haven assets, benefiting the greenback.

Further contributing to the offered tone surrounding the USD/JPY pair are the minutes of the Japanese Central Bank meeting held between March 9 and 10, 2023, which showed the Bank of Japan's (BOJ) monetary policy members still favored the continuation of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control to achieve the price stability target of 2%. This, along with the monetary policy divergence between the U.S. Federal Reserve (FED) and the Bank of Japan (BOJ), further acts as a headwind to the Yen and helps exert downward pressure on the USD/JPY pair. Additionally, a new batch of disappointing Japanese macro data further acted as a headwind to the Yen and helped cap the USD/JPY pair against further uptick. Household spending in Japan unexpectedly declined in real terms by 1.9% yoy in March 2023, missing the market consensus of a 0.4% rise and reversing from a 1.6% growth in the prior month, according to data released by the Japanese Ministry of Internal Affairs & Communications.

As we advance, without any significant market-moving economic news data from both dockets, the general market risk sentiment and treasury bond yields will continue to influence the U.S. dollar sentiment and provide short-term trading opportunities around the USD/JPY pair. The focus, however, remains on Wednesday's U.S. Consumer Price Inflation (CPI) data report for April, which is expected to show rising inflation pressures in the U.S.

Technical Outlook: Four-Hours USD/JPY Price Chart

From a technical perspective, an increase in seller momentum could see shared currency confront stiff resistance at buyer congestion levels indicated by the 50 (red) and 20 (blue) day Exponential Moving Average (EMA) at 134.975 and 134.943 levels, respectively. A convincing move below the aforementioned levels, followed by a move below the RSI (14) signal line (50), would act as a fresh trigger for sellers to push the price beyond the 134.637 support level. The southside move could be extended toward confronting the technically strong 200 (yellow) day Exponential Moving Average (EMA) at the 134.092 level. A four-hour candlestick close below this level could negate any near-term bullish outlook and pave the way for further USD/JPY weakness below the 134.000 psychological level, followed by the key support level plotted by an ascending trendline extending from the mid-April 2023 swing low.

On the flip side, if dip-buyers and tactical traders jump back in and trigger a bullish reversal, initial resistance appears at the 135.363 resistance level. Buying interest could gain momentum if the price pierces this barrier, creating the right conditions for an ascent toward the 136.000 psychological mark.