USD/JPY Cautious Ahead of the Fed & BoJ Policy Decisions

USD/JPY Analysis

The USDOLLAR is having a bad month, as signs of cooling and a sharp CPI inflation deceleration have shifted investor focus to the timing for rates cuts, with CME's FedWatch Tool assigning the highest probability of such a move within Q1 of 2024. More to it, markets expect a hike next week, but view it as one-and-done. ^[1]

However, the greenback's slump appeared excessive and managed ro rebound last week. Markets have been overly optimistic before around the inflation progress and prospects of a Fed reversal. The labor market is still tight, while the US economy grew more than estimated in Q1.

The Bank of Japan is on the other side of the policy spectrum, but expectation for normalization mount. The accounts of the last meeting had shown some support for a revision of the yield curve control (YCC). Although inflation (ex-fresh food) is off its peaks, it ticked up to 3.3% in June, according to Friday release.

However, Governor Ueda has repeatedly poured cold water to hopes of an exit of the ultra-loose policies and 77% of economists in a Reuters poll, don't anticipate a YCC change on the upcoming meeting. ^[2]

After the recent slump due to optimism for a less aggressive Fed and a change by the BoJ, the latest developments led USD/JPY to the best week of the year. This brings the high that spraked the japanese intervention of 2022 (145.90)in the spotlight, but strong catalyst would be needed for gains past that.

Japanese authorities have already supported the Yen verbally and further gains may spark further comments and potentially action. USD/JPY is facing difficulties today and this creates risk for pressure towards the lows of the month (137.22), but the downside contains multiple roadblocks.

Investors may stay on the sidelines ahead of the pivotal decisions by the Fed (Wednesday) and the Bank of Japan (Friday), the outcome of which will determine the pair's trajectory.