- USD/JPY moves lower for the third day in a row on Tuesday, amid subdued demand around the US dollar.
- Diminishing odds of a more aggressive Fed rate hike in July continue to weigh on the dollar.
- The divergence between the monetary policies of the Fed and the BoJ favors the bulls and should help limit deeper losses in the pair.
The pair USD/JPY remains on the defensive for the third day in a row on Tuesday and trades with modest intraday losses just below the 138.00 level at the start of the European session.
The US dollar failed to gain ground or take advantage of the previous day’s rebound from a one-week low, amid the Declining odds of more aggressive monetary policy tightening by the Federal Reserve. Indeed, several FOMC members last week balked at market expectations of a 100 basis point rate hike at the next meeting on July 26-27. This, in turn, continued to act as a dollar headwind and weighed on the USD/JPY pair.
However, market participants appear to be Convinced that the recent rise in US consumer inflation, which hit a four-decade high in June, warrants further rate hikes from the Fed later in the year. Expectations continued to support elevated US Treasury yields, which offered some support to the dollar. In contrast, the Bank of Japan has repeatedly stated that it will maintain its ultra-loose monetary policy. and that it will make it more flexible as necessary.
The divergence between the monetary policy adopted by the Fed and the BoJ supports the prospects of some buying at lower levels around the USD/JPY pair and the recent strong bull run continuing. That said, investors preferred to wait on the sidelines and refrained from opening aggressive positions ahead of Thursday’s BoJ decision. However, the fundamental background seems to continue to lean strongly in favor of the bulls.
Therefore, it would be prudent to wait for a strong follow-up of selling before confirming that the USD/JPY pair has topped and positioning for any significant corrective decline. Investors are now awaiting data on the US housing market, with the release of building permits and housing starts. This coupled with the broader market risk sentiment and USD price dynamics could give the USD/JPY pair a further boost.
USD/JPY technical levels to watch
Source: Fx Street
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