- USD/JPY drifts lower for the second successive day on Wednesday, albeit lacks follow-through.
- A modest downtick in the US bond yields keeps the USD on the defensive and exerts pressure.
- The divergent BoJ-Fed policy stance helps limit the downside ahead of the flash US PMI prints.
The USD/JPY pair remains under some selling pressure for the second straight day on Wednesday, albeit lacks follow-through and remains confined in a familiar range held over the past one-and-half-week or so. Spot prices manage to hold above mid-145.00s through the Asian session and the fundamental backdrop warrants some caution for aggressive bearish traders.
The US Dollar (USD) edges lower in the wake of a modest downtick in the US Treasury bond yields and turns out to be a key factor weighing on the USD/JPY pair. Apart from this, fears of an intervention by Japanese authorities to prop up the domestic currency, along with looming recession risks, benefit the Japanese Yen’s safe-haven status and contribute to the offered tone surrounding the major. That said, a big divergence in the monetary policy stance adopted by the Bank of Japan (BoJ) and other major central banks, including the Federal Reserve (Fed), should help limit losses for spot prices.
It is worth recalling that the BoJ is the only central bank in the world to maintain negative interest rates. Moreover, policymakers have emphasised that a sustainable pay hike is a prerequisite to consider dismantling the massive monetary stimulus. In contrast, the US central bank is expected to stick to its hawkish stance and keep interest rates higher for longer amid an extremely resilient domestic economy. Apart from this, the latest optimism over signs of easing US-China trade tensions might contribute to keeping a lid on any further gains for the JPY and lend some support to the USD/JPY pair.
In the latest developments surrounding the US-China saga, the US Commerce Department’s Bureau of Industry and Security (BIS) said Monday that it is removing 27 Chinese entities from its Unverified List. This comes ahead of US Commerce Secretary Gina Raimondo’s China visit from August 27 to 30 and boost investors’ confidence. Furthermore, White House National Security Advisor Jake Sullivan said that Raimondo will carry the message that the US is not seeking to decouple from China but rather to “de-risk”. This might hold back traders from positioning for any meaningful slide for the USD/JPY pair.
Market participants might also prefer to move to the sidelines ahead of the crucial Jackson Hole Symposium, where comments by Fed Chair Jerome Powell will be scrutinized for cues about the future rate-hike path. This, in turn, will play a key role in influencing the USD price dynamics and help determine the next leg of a directional move for the USD/JPY pair. In the meantime, traders will take cues from the release of the flash PMI prints from the US, which will provide fresh insights into the economic health and whether the Fed can afford to increase interest rates further.
Technical levels to watch