Japanese Yen holds gains as BoJ-Fed divergence counters USD strengt

• The Japanese Yen attracts dip-buyers after an unimpressive domestic data-inspired downtick.
• The divergent BoJ-Fed expectations continue to act as a tailwind for the lower-yielding JPY.
• Sustained USD buying could lend support to the USD/JPY pair ahead of the FOMC Minutes release.

The Japanese Yen (JPY) attracts some dip-buyers following the mixed domestic data-inspired downtick during the Asian session and turns positive for the second straight day. Investors now seem convinced that the Bank of Japan (BoJ) will stick to its policy normalization path and hike interest rates by the year-end. This, along with the cautious market mood, turns out to be a key factor acting as a tailwind for the safe-haven JPY. However, domestic political uncertainty and concerns about the potential economic fallout from higher US tariffs suggest that the prospects for BoJ rate hike could be delayed further.

Furthermore, hopes for a potential Russia-Ukraine peace deal might cap the JPY. The US Dollar (USD), on the other hand, gains traction for the third straight day amid reduced bets for a more aggressive policy easing by the Federal Reserve (Fed). This, in turn, could limit losses for the USD/JPY pair ahead of the FOMC Minutes, due later during the US session. The market focus will then shift to the flash global PMIs on Thursday and Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium, making it prudent to wait for strong follow-through selling before placing fresh bearish bets around the currency pair.

Japanese Yen gains traction as BoJ-Fed divergence offsets weak domestic data

• A report published by the Cabinet Office earlier this Wednesday showed that Japan’s core Machinery Orders rose for the first time in three months, by 3% in June, defying market expectations for a 1% drop. The rise was led by the 8.8% surge in non-manufacturing orders, which masked weakness in the manufacturing sector, where orders fell 8.1%.
• Separately, data from the Ministry of Finance showed Japan’s exports dropped for the third straight month, by 2.6% from a year earlier in July amid fears over the impact of higher US tariffs. The contraction was sharper than consensus estimates of a 2.1% and marked the steepest decline in over four years, fueling concerns about the economic outlook.
• Further details revealed that imports decreased 7.5% YoY in July, versus a 10.4% drop expected. As a result, the Trade Balance stood at a deficit of ¥117.5 billion, compared with the forecast of a surplus of ¥196.2 billion. This, in turn, prompts fresh selling around the Japanese Yen (JPY), though the Bank of Japan’s hawkish outlook helps limit further losses.
• In fact, the BoJ revised its inflation forecast at the end of the July meeting and reiterated that it will raise interest rates further if growth and inflation continue to advance in line with its estimates. This marks a significant divergence in comparison to bets that the US Federal Reserve (Fed) will resume its rate-cutting cycle at the September policy meeting.
• Moreover, traders are pricing in the possibility that the US central bank will lower borrowing costs by 25 basis points twice by the end of this year. This, in turn, might hold back traders from placing aggressive bullish bets around the US Dollar and lend support to the lower-yielding JPY, backing the case for a further depreciating move for the USD/JPY pair.
• Investors, however, trimmed their expectations for a jumbo interest rate cut by the Fed in September following last Thursday’s release of a hotter US Producer Price Index, which rose in July at the fastest monthly pace since 2022. The data indicated a gain of momentum in price pressures and should allow the Fed to stick to its wait-and-see approach.
• Hence, market participants will closely scrutinize the July FOMC Minutes, due for release later during the US session, for cues about the Fed’s rate-cut path. Apart from this, Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium will influence the near-term USD price dynamics and provide some meaningful impetus to the USD/JPY pair.

USD/JPY technical setup backs the emergence of dip-buying near the 147.10-147.00 support

From a technical perspective, Tuesday’s failure to find acceptance above the 148.00 mark and the subsequent slide seem to favor the USD/JPY bears. However, neutral oscillators on the daily chart warrant some caution. Moreover, spot prices have been oscillating in a range over the past two weeks or so. This further makes it prudent to wait for strong follow-through selling before positioning for any further depreciating move.

In the meantime, the 147.10-147.00 area could act as an immediate support, below which the USD/JPY pair could accelerate the slide towards retesting the multi-week low, around the 146.20 zone, touched last Thursday. Some follow-through selling below the 146.00 mark should pave the way for some meaningful downside in the near term.

On the flip side, bulls might wait for sustained strength and acceptance above the 148.00 mark. The USD/JPY pair might then climb to the next relevant hurdle near the 148.55-148.60 region, or the 50% retracement level of the downfall from the monthly high, before aiming to reclaim the 149.00 round-figure mark.