- USD/JPY gains some positive traction for the third day in a row amid broad dollar strength.
- Policy divergence between the Fed and the Bank of Japan, a positive risk tone undermines the JPY and continues to act as support.
- Investors are looking to the FOMC decision for further momentum ahead of the BoJ meeting on Thursday.
The pair USD/JPY reverses an intraday drop to the 143.35 area and re-enters positive territory for the third day in a row on Wednesday. The rally lifts the pair to a one-week high, around the 144.20 area during the mid-European session, and is fueled by strong follow-up US dollar buying.
Indeed, the dollar index, which measures the performance of the USD against a basket of currencies, hits a new 20-year high and remains well supported by Fed expectations. Stronger August CPI report it virtually confirmed that the US central bank will continue to tighten monetary policy at a faster pace. Markets have priced in at least a 75 basis point rate hike at the end of Wednesday’s two-day policy meeting.
In contrast, the Bank of Japan has delayed in the process of normalizing its policy and has committed to continue with its monetary easing. This marks a huge divergence from the more aggressive stance taken by other major central banks, which, coupled with a generally positive tone around equity markets, is weighing on the safe-haven Japanese yen. The combination of supportive factors continues to act as a tailwind for the USD/JPY pair to the upside.
However, upside remains limited as investors seem reluctant to make aggressive bets ahead of central bank key event risks. The Fed will announce its policy decision later in the US session. This will be accompanied by updated economic projections and the so-called dot plot. Aside from this, Fed Chairman Jerome Powell’s comments at the post-meeting press conference will be scrutinized for clues on the future path of rate hikes.
This, in turn, will play a key role in influencing the dollar’s short-term price dynamics and providing some significant lift to the USD/JPY pair ahead of the Bank of Japan meeting on Thursday. Meanwhile, the risk of a further escalation in the conflict between Russia and Ukraine and growing concerns about a further slowdown in the global economy seem to give some support to the yen. This, in turn, could cap gains for the USD/JPY pair, at least for now.
Technical levels
Source: Fx Street
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