USD/JPY oscillates in a tight range above the 146.00 level, upside potential seems intact

• USD/JPY consolidates Friday’s strong rebound from a multi-week low amid subdued demand for the USD.
• The divergence between the Fed and the Bank of Japan favors the bulls of the pair.
• Intervention fears appear to be the only factor preventing a significant rise in the pair.

The USD/JPY pair fails to take advantage of Friday’s strong recovery from the 144.45 zone, its lowest level since August 11, and starts the new week on a dovish tone. However, the pair manages to hold above the 146.00 level at the start of the European session and the fundamental background continues to lean in favor of the bulls.

The US dollar (USD) consolidates the strong post-NFP bullish move on Friday and approaches the August high again, which turns out to be a key factor that continues to act as a tailwind for the USD/JPY pair. Monthly US employment data showed the economy added 187,000 jobs in August, above market expectations and the previous month’s downwardly revised reading of 157,000. Additionally, the unemployment rate rose to 3.8% from 3.5% in July, and mean hourly earnings dipped to 4.3% annually from 4.4%. The data points to a slight deterioration in the labor market and ensures that the Fed will keep rates unchanged at its September meeting, although markets are still pricing in the possibility of a further 25 basis point hike later this year. This remains supportive of high US Treasury yields and benefits the dollar.

The Japanese Yen (JPY), on the other hand, is weighed down by the fact that the Bank of Japan (BoJ) has given no sign of an imminent change in its loose monetary policy. In fact, Toyoaki Nakamura, a board member of the BoJ, indicated last week that it was premature to tighten monetary policy, since the recent increases in inflation were mainly due to the increase in import costs and not to wage increases. On the other hand, the governor of the BoJ, Kazuo Ueda, had declared that core inflation remains slightly below the 2% target, which guarantees the status quo until next summer. This signals a large divergence compared to other major central banks, including the Fed, and suggests that the path of least resistance for USD/JPY is to the upside. That being said, the fear that the Japanese authorities could intervene in the markets to prop up the national currency seems to limit any advance for the pair.

No major economic data will be released on Monday and US banks will be closed for Labor Day, so USD/JPY could consolidate in the short term. However, the aforementioned fundamental undercurrent favors the bulls of the pair. Therefore, any significant decline could still be seen as a buying opportunity and is likely to remain limited, at least for now.

USD/JPY technical levels to watch