- USD/JPY gains positive traction for the second day in a row amid a rebound in dollar demand.
- The divergence between the monetary policies of the Fed and the BOJ weighs on the yen and remains a support for the pair’s modest rise.
- A softer risk tone caps the upside as attention turns to the risks from this week’s key central bank events.
The pair USD/JPY attracts some purchases on Tuesday and rises to the top of a four-day range, around the 143.75 region during the first half of the European session.
The US dollar regains positive traction after an initial drop to a one-week low and turns out to be a key factor driving the USD/JPY pair higher for the second day in a row. Expectations that the Fed will continue to tighten monetary policy at a faster pace to curb inflation remain a support for high US Treasury yields. This, in turn, continues to act as a tailwind for the dollar.
The Japanese yen, on the other hand, is hurt by the fact that the Bank of Japan remains hell-bent on keeping interest rates ultra-low and its flexible political orientation. This signals a wide divergence from the more aggressive stance taken by other major central banks and supports the prospects for a significant rise in the USD/JPY pair. That said, a combination of factors could limit earnings.
Market sentiment remains fragile amid concern that rapidly rising borrowing costs will spark a deeper global economic downturn. Additionally, headwinds stemming from China’s covid-zero policy and the protracted war between Russia and Ukraine have fueled recession fears. This, in turn, could offer some support to the safe-haven JPY and limit the gains of the USD/JPY pair.
Investors may also refrain from taking aggressive positions, preferring to stay on the sidelines ahead of key central bank events. It is planned that the fed announce its monetary policy decision at the end of a two-day meeting on Wednesday. This will be followed by the meeting of the Boxwood on Thursday, which will play a key role in determining the next directional move for the USD/JPY pair.
Meanwhile, traders could take a cue from US housing market data, with the release of building permits and housing starts on Tuesday. This, coupled with US bond yields, will influence dollar price dynamics and provide some momentum to the USD/JPY pair. Apart from this, the general market risk sentiment could contribute to some short-term opportunities in the pair.
Technical levels to watch
Source: Fx Street
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