USD/JPY retreats over 50 pips from Asian session peak, slides below mid-147.00s

USD/JPY gains some positive traction on Monday, albeit struggles to capitalize on the move.
The divergent BoJ-Fed policy expectations turn out to be a key factor capping further gains.
A positive risk tone undermines the safe-haven JPY and could lend some support to the pair.

The USD/JPY pair struggles to capitalize on its modest Asian session uptick to the 148.00 mark and drops to a fresh daily low in the last hour. Spot prices currently trade just below mid-147.00s and seem vulnerable to prolong Friday’s retracement slide from a two-week top.

The prevalent risk-on mood, bolstered by signs of easing fears of a recession in the US, undermines the safe-haven Japanese Yen (JPY) and lends some support to the USD/JPY pair amid a modest US Dollar (USD) uptick. That said, rising geopolitical tensions in the Middle East keep a lid on the optimism in the markets. Furthermore, the divergent Bank of Japan (BoJ)-Federal Reserve (Fed) policy expectations keep a lid on any meaningful upside for the currency pair.

Investors seem convinced that Thursday's stronger second-quarter Gross Domestic Product (GDP) print released from Japan could encourage the Bank of Japan (BoJ) to continue raising interest rates. In contrast, the US central bank is all but certain to begin its policy-easing cycle in September. The bets were reaffirmed by San Francisco Fed President Mary Daly's remarks that the US central bank needs to take a gradual approach to lowering borrowing costs.

The aforementioned fundamental backdrop suggests that the path of least resistance for the USD/JPY pair is to the downside. Investors, however, might prefer to wait for more cues about the Fed's rate-cut path before positioning for the next leg of a directional move. Hence, the focus will remain on the release of the FOMC meeting minutes on Wednesday, which will be followed by Fed Chair Jerome Powell's speech at the Jackson Hole Symposium on Friday.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.

Is the Bank of Japan’s ultra-loose policy likely to change soon?

A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.

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