USD/JPY Outlook: Bulls retain control near YTD peak ahead of Powell's testimony

• USD/JPY regains positive traction and climbs back closer to Tuesday's YTD high.
• Dovish BoJ minutes undermine the JPY and act as a tailwind amid modest USD strength.
• Investors look to Fed Chair Jerome Powell’s testimony for a fresh directional impetus.

The USD/JPY pair attracts fresh buying on Wednesday and reverses a major part of the previous day's slide from the 142.25 area, its highest level since November 2022. The pair maintains its bid tone heading into the European session and is drawing support from a combination of factors. The Japanese Yen (JPY) weakens in reaction to the dovish Bank of Japan (BoJ) meeting minutes, which showed that the nine-member board saw the need to keep ultra-low interest rates to support the fragile domestic economy. Adding to this, BoJ policymaker Seiji Adachi brushed aside expectations of an early tweak in the yield curve control policy and said that it was too early to phase out ultra-loose monetary policy due to uncertainty over the price outlook. This marks a big divergence in comparison to the Federal Reserve's (Fed) hawkish outlook, forecasting a higher peak interest rate this year, which further contributes to driving flows away from the JPY.

The US central bank decided to pause its year-long rate-hiking cycle last week, but signalled that borrowing costs may still need to rise as much as 50 bps by the end of this year. Markets were quick to react and are pricing in another 25 basis points (bps) lift-off at the next FOMC policy meeting in July. These bets were reaffirmed by strong housing market data released from the US on Tuesday, showing that Housing Starts surged to a 13-month high in May. Adding to this, permits for future construction also climbed during the reported month, suggesting that the housing market may be turning a corner after taking the biggest hit from the Fed's fastest monetary policy tightening campaign since the 1980s. This, in turn, acts as a tailwind for the US Dollar (USD) and supports prospects for an extension of the USD/JPY pair's well-established uptrend seen over the past three months.

However, bullish traders might prefer to wait on the sidelines ahead of Fed Chair Jerome Powell's semi-annual congressional testimony, due later during the early North American session. Market participants will look for clues about the future rate-hike path amid speculations that the US central bank is nearing the end of its policy tightening cycle. Apart from this, speeches by a slew of influential FOMC members, along with US bond yields, will drive USD demand and provide some meaningful impetus to the USD/JPY pair. In the meantime, a generally softer risk tone could offer some support to the safe-haven JPY and cap gains for the major. Worries about a global economic downturn, to a larger extent, overshadow an interest rate cut by the People's Bank of China (PBoC) on Tuesday and continue to weigh on investors' sentiment.

Technical Outlook

From a technical perspective, sustained strength and acceptance above the 142.00 mark should set the stage for additional gains. Moreover, oscillators on the daily chart are holding in the positive territory and are still far from being in the overbought zone. Some follow-through buying beyond the overnight peak, around the 142.25 area, will reaffirm the constructive outlook and lift the USD/JPY pair to the 143.00 round figure en route to the next relevant hurdle near the 143.75 region and the 144.00 mark. Positive momentum could extend further towards the 144.30-144.35 intermediate hurdle, above which bulls might aim to reclaim the 145.00 psychological mark.

On the flip side, the 141.30-141.20 region seems to have emerged as an immediate strong support. A convincing break below might prompt some technical selling and drag the USD/JPY pair below the 141.00 mark, towards testing the 140.60-140.55 horizontal support. Any subsequent decline might still be seen as a buying opportunity near the 140.25 zone and remain limited near the 140.00 psychological mark. The latter should act as a strong base for spot prices, which if broken decisively might shift the near-term bias in favour of bearish traders.