- A modest USD pullback drags USD/JPY lower for the second day in a row on Tuesday.
- The monetary policy divergence between the BoJ and the Fed acts as a tailwind for the pair and helps limit any significant decline.
- Investors are now waiting for US economic data to gain some momentum ahead of the BoJ on Thursday.
The pair USD/JPY remains on the defensive during the European session on Wednesday, trading modest intraday losses just below the 128.00 level.
The US dollar pulled back a bit from its highest level since March 2020 hit the previous day, which in turn was seen as a key factor dragging the USD/JPY pair lower for the second day in a row. Nevertheless, the decline remains supported amid a wide divergence in the monetary policy stance adopted by the Fed and the Bank of Japan.
Aggressive comments from various FOMC officials last week, including Fed Chairman Jerome Powell, reaffirmed that the Fed would tighten monetary policy at a faster pace to reduce runaway inflation. Indeed, markets now expect the US central bank to raise interest rates by 50 basis points at each of its next four meetings in May, June, July and September.
By contrast, the BoJ has said multiple times that it remains ready to use tools to prevent long-term rates from rising too high and sustain the current powerful monetary easing to support the economy. It is worth recalling that last week the BoJ again offered to buy indefinite amounts of Japanese government bonds to defend the 0.25% yield limit.
This along with modest rebound in US Treasury yields favors pair bulls and supports the prospects for some buying around the USD/JPY pair. Investors, however, may refrain from opening aggressive positions and prefer to wait for the BoJ’s monetary policy decision and economic outlook report on Thursday.
Meanwhile, investors will take cues from the US economic calendar, with the release of the Conference Board Consumer Confidence Index and Durable Goods Orders. This, along with US bond yields, will influence the USD price dynamics. Aside from this, the broader market risk sentiment should provide some lift to the USD/JPY pair.
USD/JPY technical levels
Source: Fx Street
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