- USD/JPY gains positive traction for the second successive day amid a pickup in the USD demand.
- The Fed-BoJ policy divergence undermines the JPY and remains supportive of the modest uptick.
- A softer risk tone caps the upside as the focus remains on this week’s key central bank event risks.
The USD/JPY pair attracts some dip-buying on Tuesday and climbs to the top boundary of a four-day-old trading range, around the 143.75 region during the first half of the European session.
The US dollar regains positive traction following an early slide to a one-week low and turns out to be a key factor pushing the USD/JPY pair higher for the second successive day. Expectations that the Fed will continue to tighten its monetary policy at a faster pace to tame inflation remain supportive of elevated US Treasury bond yields. This, in turn, continues to act as a tailwind for the greenback.
The Japanese yen, on the other hand, is undermined by the fact that the Bank of Japan remains committed to maintaining ultra-low interest rates and its dovish policy guidance. This marks a big divergence in comparison to a more hawkish stance adopted by other major central banks and supports prospects for some meaningful upside for the USD/JPY pair. That said, a combination of factors could cap gains.
The market sentiment remains fragile amid concerns that rapidly rising borrowing costs will lead to a deeper global economic downturn. Adding to this, headwinds stemming from China's zero-covid policy and the protracted Russia-Ukraine war have been fueling recession fears. This, in turn, could offer some support to the safe-haven JPY and keep a lid on any further gains for the USD/JPY pair.
Investors might also refrain from placing aggressive bets and prefer to move to the sidelines ahead of the key central bank event risks. The Fed is scheduled to announce its monetary policy decision at the end of a two-day meeting on Wednesday. This will be followed by the BoJ meeting on Thursday, which will play a key role in determining the next leg of a directional move for the USD/JPY pair.
In the meantime, traders on Tuesday might take cues from the US housing market data – Building Permits and Housing Starts. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to the USD/JPY pair. Apart from this, the broader market risk sentiment could further contribute to producing short-term trading opportunities around the major.
