- USD/JPY gained some positive momentum on Monday but struggled to capitalize on the move.
- Diverging policy forecasts from the Bank of Japan and the Federal Reserve proved to be the main factor restraining further gains.
- A positive risk stance could weaken the safe haven yen, providing some support to the currency pair.
The USD/JPY pair struggled to capitalize on a modest rise to the 148.00 level during the Asian session, dropping to a new intraday low in the final hour. Spot prices are currently trading just below the mid-147.00 level, suggesting an extended retracement of Friday’s decline from two-week highs looks likely.
A growing risk-on mood, buoyed by signs of easing US recession fears, has given some support to the USD/JPY pair as safe haven Japanese Yen (JPY) weakens in value and the US Dollar (USD) strengthens slightly. However, rising geopolitical tensions in the Middle East are keeping market optimism in check. Moreover, diverging policy outlooks between the Bank of Japan (BoJ) and the Federal Reserve (FRB) are limiting any significant gains for the pair.
Investors seem confident that the Bank of Japan (BOJ) will continue to raise interest rates, following strong second-quarter gross domestic product (GDP) figures released by Japan on Thursday. In contrast, the U.S. central bank is almost certain to begin an easing cycle in September, a view reaffirmed by San Francisco Federal Reserve President Mary Daly’s comments that the U.S. central bank needs to take a gradual approach to lowering borrowing costs.
The aforementioned fundamental backdrop suggests that the path of least resistance for the USD/JPY pair is to the downside. However, investors may prefer to wait for further clues regarding the path of Fed rate cuts before preparing for the next directional move. Thus, the focus remains on the release of the FOMC minutes on Wednesday, followed by Fed Chairman Jerome Powell’s speech at the Jackson Hole Symposium on Friday.
