- USD/JPY is encountering fresh bid and retreating sharply from the 145.00 vicinity.
- Jawboning by Japanese authorities points to imminent intervention and boosts JPY.
- The occurrence of some selling around the USD also contributes to the intraday drop.
The USD/JPY pair it faces rejection near the psychological 145.00 level and retreats from near the 24-year high that was retested earlier this Wednesday. The downward trajectory stretches through the first half of the European session, although the pair managed to bounce back a few pips from the daily low and is currently sitting just above the 143.00 mark.
A combination of factors does not help the USD/JPY pair to capitalize on the previous day’s post-US CPI increase of more than 300 pips. The Japanese yen is strengthening across the board amid jitters from Japanese officials and chances that the Bank of Japan (BoJ) may intervene to stop the domestic currency’s free fall. This, along with the emergence of some US dollar selling, puts downward pressure on the major.
This means that a recovery in global risk-on sentiment – as illustrated by the generally positive tone in equity markets – could limit gains for the safe-haven JPY. In addition, the large divergence in monetary policy settings adopted by the Bank of Japan and the Federal Reserve supports the prospect of some bearish buying around the USD/JPY pair. The BoJ remains committed to continuing to ease monetary policy.
In contrast, the US Federal Reserve is expected to continue raising interest rates at a faster pace to tame inflation. Bets were confirmed on Tuesday by a stronger US CPI report. Markets quickly started to price in the possibility of a full 1% rate hike at the next FOMC meeting on September 20-21. This is evident from the recent rise in US Treasury yields, which favors USD bulls and should provide support to the USD/JPY pair.
However, the fundamental backdrop remains firmly tilted in favor of bullish traders. So any subsequent decline could still be seen as a buying opportunity and remain limited. Market participants are now looking forward to the US Producer Price Index (PPI), which will be released later in the early North American session. Additionally, US bond yields and broader risk sentiment should provide some impetus to the USD/JPY pair.