The USD/JPY pair faced selling pressure on Tuesday, reversing a significant portion of its previous day’s gains and edging closer to the psychological level of 145.00. During the first half of the European session, spot prices remained subdued and currently hover just below the mid-144.00s, experiencing a 0.15% decline for the day.
Rumors surrounding a possible intervention by the Japanese government to prevent a sharp decline in the domestic currency acted as a deterrent for the USD/JPY pair. Japanese Finance Minister Shunichi Suzuki cautioned last week that appropriate measures would be taken if the Japanese Yen (JPY) weakened excessively.
Furthermore, Japan’s top financial diplomat, Masato Kanda, stated on Tuesday that authorities were in close contact with US Treasury Secretary Janet Yellen and engaged in currency discussions with various countries.
Additionally, concerns over a global economic downturn boosted the appeal of the safe-haven JPY, alongside subdued price action in the US Dollar (USD), contributing to the slightly bearish sentiment surrounding the USD/JPY pair.
However, the divergence in monetary policy between the Bank of Japan (BoJ) and the Federal Reserve (Fed) limited the downside. Market participants widely believe that the BoJ will prioritize supporting a fragile economic recovery and maintain its ultra-loose monetary policy settings, expecting inflation to slow later this year.
In contrast, the US central bank indicated in June that borrowing costs may still need to rise by as much as 50 bps by the year’s end, a view reinforced by Fed Chair Jerome Powell’s recent remarks.
Consequently, US Treasury bond yields experienced a sharp intraday increase, providing some support to the USD.
Nonetheless, the softer US PCE Price Index released on Friday, combined with a weaker US ISM PMI on Monday, raise doubts about the extent to which the Fed can continue tightening its monetary policy, thus tempering bullish sentiment for the USD.
Traders exhibited hesitance due to relatively thin trading volumes resulting from the Independence Day holiday in the US and in anticipation of key releases later in the week. The minutes of the June FOMC meeting, set to be published on Wednesday, will be closely scrutinized for hints about the future rate-hike trajectory.
Additionally, the US non-farm payroll (NFP) report, scheduled for Friday, will significantly impact the USD and provide fresh direction to the USD/JPY pair. Overall, the underlying fundamentals suggest that the path of least resistance for spot prices favors an upward movement.
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