The USD/JPY pair showed signs of gaining some positive traction on Monday but struggled to capitalize on the move. Despite a modest uptick during the Asian session to the 148.00 mark, the pair dropped to a fresh daily low in the last hour of trading. Currently trading just below the mid-147.00s, the pair appears vulnerable to a retracement slide from a two-week top.
One crucial factor capping further gains for the USD/JPY pair is the divergent policy expectations between the Bank of Japan (BoJ) and the Federal Reserve (Fed). While the BoJ is expected to continue raising interest rates following a stronger second-quarter Gross Domestic Product (GDP) print, the Fed is gearing up to begin its policy-easing cycle in September. This dichotomy in policy outlooks keeps a lid on any meaningful upside for the currency pair.
Despite the challenges posed by the BoJ-Fed policy divergence, a positive risk tone in the market undermines the safe-haven Japanese Yen (JPY). This dynamic could potentially lend some support to the USD/JPY pair, especially with a modest uptick in the US Dollar (USD). However, geopolitical tensions in the Middle East continue to weigh on market optimism, tempering the overall risk appetite.
Waiting for Fed Signals
Investors are keeping a close eye on the upcoming release of the FOMC meeting minutes on Wednesday and Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Symposium on Friday. These events will provide more clarity on the Fed’s rate-cut path, which could influence the next directional move for the USD/JPY pair. Investors may opt to wait for more cues before positioning themselves for the next leg of the pair’s movement.
Overall, the fundamental backdrop suggests that the path of least resistance for the USD/JPY pair is tilted to the downside, given the prevailing BoJ-Fed policy expectations and market uncertainties. While some positive traction has been observed, the pair faces challenges in capitalizing on these gains amidst a complex economic and geopolitical landscape.