USD/JPY remains near one-week highs, but fails to break above 132.00

• USD/JPY receives aggressive bids on Wednesday and hits 1-week highs.
• Risk appetite undermines the yen’s safe haven and supports the pair.
• The Fed’s less aggressive stance keeps the USD on the back foot and limits gains.

The pair USD/JPY recovers positive traction after the fall of the previous day and maintains its buying tone until the middle of the European session on Wednesday. This propels the pair to 1-week highs, though bulls are struggling to capitalize on the move beyond 132.00.

Easing fears of a full-blown banking crisis continue to support a generally positive tone around equity markets, which, in turn, undermines the safe-haven Japanese yen (JPY) and acts as a tailwind for the USD/JPY pair. The acquisition of Silicon Valley Bank by First Citizens Bank & Trust Company calmed market nerves at the risk of contagion. This, coupled with the absence of negative news from the banking sector in the past two weeks, further boosted investor confidence and helped reverse recent negative sentiment.

The yen continues to be weighed down by the dovish statements by the Governor of the Bank of Japan, Haruhiko Kuroda, in which he stated that it is too early to discuss the exit from expansionary monetary policy. In addition, the recent widening of the US-Japan rate differential, fueled by the rally in US Treasury yields seen since earlier this week, also helps drive flows away from the yen. That being said, the weak demand for US dollars (USD) prevents traders from placing further bullish bets on the USD/JPY pair.

Last week, the Federal Reserve (Fed) eased its strategy to curb inflation, signaling that a pause in interest rate hikes was coming amid turmoil in the banking sector. This has caused a further drop in US Treasury yields and could be a negative factor for the dollar. On the other hand, the BOJ is expected to modify its bond yield control policy and scale back its huge stimulus under new Governor Kazuo Ueda. This will help keep the USD/JPY pair in check, at least for now.

Market participants now turn to the US economic calendar, with the release of pending home sales later in the early North American session. On the other hand, US bond yields will influence dollar price dynamics and boost USD/JPY. Traders will follow the risk sentiment in the markets to take advantage of short-term opportunities. However, attention remains focused on the release of the Fed’s preferred inflation gauge, the US Core PCE Price Index, due on Friday.

Technical levels to watch