- USD/JPY is languishing near its lowest level since the start of the year due to differences in policy forecasts between the Fed and the Bank of Japan.
- Bears may refrain from making fresh bets ahead of central bank event risks this week.
- The Fed will announce its decision on Wednesday, followed by the Bank of Japan's policy update on Friday.
In Monday’s Asian session, the USD/JPY pair languished in the mid-140.00s amid light trading volumes due to the Japanese holiday and looks vulnerable near the yearly lows reached last week. However, bearish traders may prefer to wait for the risk of major central bank events this week before bracing for further declines.
The US Federal Reserve (Fed) is scheduled to announce its decision at the end of its two-day meeting on Wednesday, followed by the Bank of Japan (BoJ) policy update on Friday. Meanwhile, divergence in Fed and BoJ policy expectations has led to an unwinding of the recent Japanese Yen (JPY) carry trade, keeping the USD/JPY pair under continued downward pressure.
After the US Consumer Price Index (CPI) and Producer Price Index (PPI) reports released last week showed signs of easing inflationary pressures, markets have begun to price in an increasingly likely larger interest rate cut of 50 basis points (bps) by the US central bank. In contrast, recent hawkish comments from Bank of Japan officials have reaffirmed the market's view that Japan's central bank will announce further interest rate hikes by the end of this year.
This suggests that the path of least resistance for the USD/JPY pair remains to the downside, supporting the outlook for an extension of the established downtrend seen over the past couple of months. That said, the overall risk positivity could limit any significant upside in safe-haven JPY and discourage bulls from making new bets in the absence of relevant macro data.
