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• USD/JPY drifts lower for the second straight day and hits a nearly two-week low on Friday.
• Intervention fears, along with the risk-off mood, boost the JPY and exerts heavy pressure.
• The Fed-BoJ policy divergence could help limit further losses ahead of the US NFP report.

The USD/JPY pair remains under heavy selling pressure for the second successive day on Friday and drops to a nearly two-week low, around the 143.15 region during the early European session.

Against the backdrop of fear about the potential intervention by Japanese authorities to support the domestic currency, the risk-off mood boosts demand for the safe-haven Japanese Yen (JPY). Investors remain worried about economic headwinds stemming from rapidly rising borrowing costs. Adding to this, the risk of a further escalation in trade conflicts between the US and China - the world's two largest economies - takes its toll on the global risk sentiment. This, along with subdued US Dollar (USD) price-action, contributes to the offered tone surrounding the USD/JPY pair. 

The US ISM Services PMI released on Thursday showed that the Prices Paid sub-component fell to a more than two-year low and suggested that inflation is gradually slowing. This, in turn, fuels speculations that the Federal Reserve (Fed) will eventually soften its hawkish stance, sooner rather than later, which, in turn, keeps the USD bulls on the defensive. The markets, however, have nearly fully priced in a 25 bps lift-off at the July FOMC meeting. Moreover, the Fed had signalled in June that borrowing costs may still need to rise as much as 50 bps by the end of this year.

The hawkish outlook allows the yield on the two-year US government bond, which is typically highly sensitive to interest rate expectations, to stand tall near its highest since June 2007. Moreover, the benchmark 10-year US Treasury yield holds steady above the 4.0% threshold and acts as a tailwind for the Greenback. The resultant widening of the US-Japan rate differential, along with expectations that the Bank of Japan's (BoJ) negative interest-rate policy will remain in place at least until next year, supports prospects for the emergence of some dip-buying around the USD/JPY pair.

Hence, the ongoing downfall might still be categorized as a corrective pullback as bullish traders opt to lighten their bets ahead of the release of the closely-watched US monthly employment details. The popularly known NFP report is due later during the early North American session and will play a key role in influencing the Fed's policy outlook. This, in turn, will drive the USD demand and help determine the next leg of a directional move for the USD/JPY pair. Nevertheless, spot prices remain on track to register heavy weekly losses for the first time in the previous four.
 

Technical levels to watch

USD/JPY

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