• USD/JPY drifts lower on Wednesday and snaps a three-day winning streak to a three-week top.
• Fitch downgrade of the US rating weighs on the USD and benefits the JPY's safe-haven status.
• The divergent BoJ-Fed outlook lends some support to the pair and helps limit any further losses.

The USD/JPY pair meets with some supply during the Asian session on Wednesday and erodes a part of the previous day's strong gains to the 143.55 area, or over a three-week high. Spot prices, however, manage to rebound a few pips from the daily low and currently trade just above the 143.00 mark, down less than 0.20% for the day.

The US Dollar (USD) weakens a bit after Fitch downgraded the US government's credit rating to AA+ from AAA, citing concerns over the state of the country's finances and its debt burden. The announcement took its toll on the global risk sentiment, which is evident from a modest downfall in the US equtiy futures and benefits the safe-haven Japanese Yen (JPY). Apart from this, the Bank of Japan (BoJ) noted that there is strong chance consumer inflation will moderate, but won't slow back below 2%, toward middle of current fiscal year. This lends additional support to the JPY and exerts some downward pressure on the USD/JPY pair.

That said, the minutes from the BoJ policy meeting revealed that members agreed to maintain the current easy monetary policy. Moreover, BoJ Governor Kazuo Ueda had said that the central bank won't hesitate to ease policy further and added that more time was needed to sustainably achieve the 2% inflation target. This, in turn, keeps a lid on any meaningful gains for the JPY. Apart from this, the emergence of some USD dip-buying assists the USD/JPY pair to recover over 40 pips from the daily trough, warranting some caution before placing aggressive bearish bets and positioning for any meaingful intraday depreciating move.

The incoming US macro data continues to point to an extremely resilient economy and keeps the door open for one more 25 bps rate hike by the Federal Reserve (Fed) in September or November. Against the backdrop of the upbeat US GDP report released last week, data showed factory production rebounded in the second quarter and ended two straight quarterly declines. Moreover, US construction spending increased solidly last month and May's data was revised higher. Adding to this, JOLTS report remains consistent with tight labor market conditions and supports prospects for further policy tightening by the Fed.

Market participants now look to the US economic docket, featuring the release of the ADP report on private-sector employment. This, along with the broader risk sentiment, will be looked upon for short-term trading opportunities around the USD/JPY pair. The market focus, however, will remain glued to the closely-watched US monthly employment details, popularly known as the NFP report, due on Friday.

Technical levels to watch