• USD/JPY witnessed selling for the third successive day amid broad-based USD weakness.
• Weakness below the 137.50-45 confluence would pave the way for a deeper correction.
• A sustained strength back above the 138.00 mark is needed to negate any negative bias.

The USD/JPY pair prolonged its corrective pullback from a 24-year high touched last week and continued losing ground for the third successive day on Tuesday. The downward trajectory dragged spot prices to a three-day low, around the 137.50-137.45 area during the early North American session and was sponsored by the prevalent US dollar selling bias.

Investors continue scaling back their bet for a 100 bps Fed rate hike move later this month, which, in turn, was seen as a key factor that exerted downward pressure on the USD/JPY pair. That said, the divergent Fed-Bank of Japan policy stance, along with the risk-on impulse, could undermine the safe-haven Japanese yen and help limit deeper losses.

From a technical perspective, the USD/JPY pair was seen flirting with confluence support comprising the 38.2% Fibonacci retracement level of the 134.25-139.39 rally and the 200-period SMA on the 1-hour chart. A convincing break below the said support might prompt aggressive technical selling and drag the pair further below the 137.00 round-figure mark.

The latter is closely followed by support marked by the 50% Fibo. level, around the 136.80 region. Some follow-through selling would be seen as a fresh trigger for bearish traders and set the stage for an extension of the downfall. Spot prices could then drop towards the next relevant support near the 61.8% Fibo. level, just ahead of the 136.00 mark.

On the flip side, the 138.00 round figure, nearing the 23.6% Fibo. level, now seems to act as an immediate hurdle. A sustained strength beyond would suggest that the corrective slide has run its course and allow the USD/JPY pair to reclaim the 139.00 mark. Bulls might eventually aim back to challenge the YTD peak, around the 139.40 region.

USD/JPY 1-hour chart

Key levels to watch