USD/JPY holds on to modest intraday gains, holds below 147.00 level

• USD/JPY regains some positive traction on Tuesday, although it lacks follow-through.
• Intervention fears and a softer risk tone benefit the Yen and limit the pair’s gains.
• The divergence between the monetary policies of the Fed and the BoJ should act as a tailwind for the pair ahead of the US CPI.

The USD/JPY pair extends the previous day’s late rebound from levels below 146.00, one-week lows, and gains some positive traction on Tuesday. However, the pair fails to capitalize on the momentum and remains capped just below the 147.00 level.

The immediate market reaction to Bank of Japan Governor Kazuo Ueda’s comments is fading rather quickly, as market participants seem convinced that the Japanese central bank will maintain the status quo until next summer. In an interview with the Yomiuri newspaper published on Saturday, Ueda said ending negative interest rates is among the options available if the BoJ is confident that prices and wages will continue to rise sustainably. However, the general secretary of the Liberal Democratic Party (LDP), Hiroshige Seko, indicated his preference for an ultra-flexible monetary policy. Seko added that BoJ Governor Ueda had said the exit from loose policy would occur after reaching the 2% inflation target.

This eases market fears about an imminent dovish policy shift from the BoJ, which along with the emergence of some buying around the US Dollar (USD), acts as a tailwind for the USD/JPY pair. Prospects for further tightening of monetary policy by the Federal Reserve (Fed) continue to support elevated US Treasury yields and revive demand for the USD. The US central bank is expected to pause its rate-hiking cycle in September, although markets are pricing in the possibility of a further 25 basis point hike in 2023. These expectations were reaffirmed by upbeat US macroeconomic data released last week. , which aimed at a resilient economy. Furthermore, the fact that inflation is not cooling fast enough should allow the Fed to keep interest rates higher for longer.

Therefore, market attention will remain focused on the crucial US CPI report, which is due out on Wednesday and will provide new clues on the Fed’s future rate hike path. This, in turn, will play a key role in influencing the short-term USD price dynamics and determining the next directional move for the USD/JPY pair. Meanwhile, the caution prevailing in the markets provides support to the Japanese Yen (JPY). Apart from this, speculation that Japanese authorities could intervene to stem any further weakness in the domestic currency acts as a headwind for the pair. However, the aforementioned fundamental background suggests that the path of least resistance for is to the upside.

USD/JPY technical levels to watch