USD/JPY with modest losses near 146.50, just below the yearly high

• USD/JPY falls back on Tuesday, snapping a three-day winning streak to hit a yearly high.
• The pullback in US bond yields is keeping USD bulls on the back foot and putting some pressure on the pair.
• The divergence between Bank of Japan and Fed monetary policy should help limit losses, though bears should tread cautiously.

USD/JPY is in some selling on Tuesday and pulls back from its highest level since November 2022, around the 146.75 region touched the day before. The pair is currently trading around the 146.40-146.45 zone, down around 0.10% on the day, and for now, appears to have snapped a three-day winning streak, though any significant corrective decline still looks elusive.

The US dollar (USD) remains under pressure for the second day in a row and extends its reversal from a nearly three-month high hit on Friday amid a further decline in US Treasury yields. Apart from this, Speculation that the Japanese authorities will intervene in the currency markets to prop up the national currency is putting some downward pressure on the USD/JPY pair. That being said, the large divergence in monetary policy stance taken by the Bank of Japan (BoJ) and other major central banks, including the Federal Reserve (Fed), should act as a tailwind for USD/JPY.

It should be remembered that the BoJ is the only central bank in the world that maintains negative rates and is expected to stick to its ultra-easy monetary policy setting. These expectations were confirmed by BoJ Governor Kazuo Ueda’s remarks at the Jackson Hole symposium on Sunday, in which he stated that core inflation in Japan remains slightly below the 2% target. By contrast, Fed Chairman Jerome Powell cemented expectations for a further 25 basis point hike later this year, saying on Friday that the US central bank may have to raise interest rates further to cool a inflation still too high.

The growing acceptance that the Fed will keep interest rates higher for longer should limit declines in US bond yields and support the prospects for some dollar buying. Therefore, it is prudent to wait for strong selling before confirming that USD/JPY has topped out in the near term and positioning for a further bearish move in the pair. The Conference Board’s consumer confidence index and the JOLTS job offers data will be published early in the American session on the US economic agenda.

Beyond this, US bond yields will influence USD price dynamics, which, along with broader risk sentiment, which tends to drive safe-haven demand for the JPY, should help. to produce short-term opportunities around the USD/JPY pair. However, attention will remain focused on other important US macroeconomic data scheduled for this week, including the monthly NFP jobs data, due on Friday.

USD/JPY technical levels to watch