The USD/JPY pair began the new week on a positive note, with some upside potential but limited. The positive risk tone seen in the market has dampened the demand for the safe-haven Japanese Yen, providing some support to the major currency pair.
Traders are now eagerly awaiting the crucial policy decisions from the Bank of Japan (BoJ) and the Federal Reserve (Fed) scheduled for Wednesday. The sentiment in the market remains cautious as investors look for clues from these central banks regarding their future monetary policy.
A strong bullish sentiment in the global equity markets has led to a risk-on impulse, which has in turn weakened the JPY and helped the USD/JPY pair gain positive traction. However, the possibility of further appreciation may be hindered by the divergent expectations surrounding the BoJ and the Fed’s policies.
The BoJ is anticipated to reduce bond buying and potentially raise interest rates, signaling a hawkish stance. On the other hand, the market has already priced in the likelihood of the Fed starting an easing cycle in September, with expectations for up to three interest rate cuts by the year-end. This disparity in policy expectations adds to the uncertainty in the USD/JPY pair.
From a technical standpoint, the breakdown below the 100-day Simple Moving Average (SMA) last week was a bearish signal. However, the slightly oversold Relative Strength Index (RSI) on the daily chart prompted some short-covering, indicating a possible shift in momentum.
The USD/JPY pair remains in a state of flux as traders brace themselves for the upcoming central bank decisions. The market sentiment is influenced by both fundamental factors, such as policy expectations, and technical indicators. The week ahead promises to be eventful for the currency pair as it navigates through uncertain waters.