USD/JPY slips below 142.00 amid weaker USD, focus remains on Fed decision

• USD/JPY meets with fresh selling and reverses some of the overnight recovery gains.
• Diverging monetary policy expectations between the Fed and the BoJ are supporting the JPY and exerting some pressure.
• Investors await critical Fed decision ahead of key BoJ policy update on Friday.

The USD/JPY pair attracts fresh sellers during the Asian session on Wednesday and retreats below the 142.00 level in the last hour, eroding some of the overnight gains and halting its recovery from the lowest level since July 2023 touched earlier this week. Meanwhile, the fundamental backdrop suggests that the path of least resistance for spot prices is to the downside, although traders may refrain from placing aggressive bets ahead of key central bank event risks.

The Federal Reserve (Fed) is scheduled to announce its decision at the end of a two-day meeting later on Wednesday and is universally expected to kick off its monetary policy easing cycle. Market attention will then shift to the Bank of Japan (BoJ) policy update on Friday, which will play a key role in influencing the Japanese Yen (JPY) and provide a fresh directional impetus to the USD/JPY pair. Meanwhile, the cautious market mood coupled with divergent monetary policy expectations between the Fed and BoJ is driving some safe-haven flows into the JPY and is proving to be a key factor putting downward pressure on the USD/JPY pair.

Markets have been pricing in a 50 basis point (bp) interest rate cut by the Fed as more likely amid signs of easing inflationary pressures. This overshadows the better-than-expected release of US retail sales data on Tuesday and fails to help the US Dollar (USD) capitalise on the overnight bounce from the 2024 low. In contrast, recent hawkish signals from BoJ officials suggest that the Japanese central bank will hike rates again by the end of this year. This has been a key factor behind the recent relative performance of the JPY and contributes to the selling tone around the USD/JPY pair.

Meanwhile, JPY bulls seem rather unfazed by Japan’s August trade data, which showed a major miss in both exports and imports. According to official data, Japan’s exports rose for the ninth consecutive month, at a year-on-year rate of 5.6% in August, but at a much slower pace than expected. This was accompanied by a substantially lower than expected 2.3% growth in imports, although it did little to dampen the underlying bullish sentiment around the JPY. This, in turn, validates the negative near-term outlook for the USD/JPY pair and supports prospects for an extension of the recent well-established downtrend.