- USD/JPY gains traction on Friday and pulls away from the one-week low set the day before.
- The divergence between the policies of the Fed and the Bank of Japan and the positive risk tone weaken the yen and act as a tailwind for the pair.
- Recent aggressive comments from Fed officials help revive USD demand and continue to offer support for the pair.
The pair USD/JPY builds on the previous day’s good recovery move from the 131.75-131.70 area or a 1.5 week low and gains some positive traction on Friday. The pair maintains its buying tone during the first part of the European session and is currently just below 133.50.
A combination of factors weighs on the Japanese yen and acts as a tailwind for the USD/JPY pair amid a modest pickup in US dollar demand. The Strong rally from previous day Jan in US Treasuries yields widens US-Japan rate spread, which, along with a positive risk tone, weighs on the safe-haven Japanese yen. Apart from this, the wide divergence in the monetary policy stance adopted by the Bank of Japan and the Federal Reserve offers additional support to the pair.
In fact, the BoJ has repeatedly stated that it will maintain its ultra-loose monetary policy. In contrast, recent hawkish comments from several Fed officials indicate that the US central bank remains on track to tighten monetary policy further. San Francisco Fed President Mary Daly, St. Louis Fed President James Bullard, Chicago Fed President Charles Evans, and Minneapolis Fed President Neel Kashkari, supported this week the arguments in favor of further increases in interest rates.
That said, signs of easing inflationary pressures in the US could have forced investors to cut expectations for a Fed rate hike of 75 at the September policy meeting. On Wednesday, the US CPI reported that consumer prices were unchanged in July. In addition, the producer price index US PPI unexpectedly fell in July for the first time in two years, suggesting that inflation may have peaked. This, in turn, increases uncertainty about the size of the Fed’s next rate hike.
However, the US central bank is expected to raise its benchmark interest rates by at least 50 basis points in September. Furthermore, the appearance of fresh buying on Tuesday supports the prospects for further short-term appreciation of the USD/JPY pair. Market participants now await the release of the preliminary Michigan Consumer Sentiment Index. This coupled with US bond yields and broader risk sentiment could give the pair some lift.
USD/JPY technical levels
Source: Fx Street
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