- USD/JPY regains positive traction on Monday and is supported by a pickup in the USD demand.
- The Fed-BoJ policy divergence continues to weigh on the JPY and remains supportive of the move.
- Fears of a BoJ intervention, a softer risk tone to limit losses for the JPY and might cap the upside.
The USD/JPY pair attracts fresh buying near the 142.65 area on Monday and builds on its steady intraday ascent through the early European session. Spot prices hit a fresh daily low, around the 143.50-143.55 region in the last hour, reversing Friday's modest negative move amid a goodish pickup in demand for the US dollar.
The US consumer inflation figures for August all but cemented expectations for a more aggressive policy tightening by the Fed. In fact, the markets have been pricing in at least a 75 bps rate increase and a smaller chance of a full 100 bps hike at this week's FOMC meeting. This remains supportive of elevated US Treasury bond yields, which continue to act as a tailwind for the greenback and is offering support to the USD/JPY pair.
In contrast, the Bank of Japan has been lagging far behind in the process of policy normalisation and remains committed to continuing with its monetary easing. This marks a big divergence in comparison to a more hawkish stance adopted by other major central banks, which continues to undermine the Japanese yen and provide an additional lift to the USD/JPY pair. That said, a combination of factors might keep a lid on any further gains.
Speculations that the BoJ may soon step in to arrest any further freefall in the domestic currency, along with the prevalent risk-off environment, extend some support to the safe-haven JPY. Investors also seem reluctant and prefer to move on the sidelines ahead of this week's key central bank event risks. The Fed is scheduled to announce its policy decision on Wednesday, which will be followed by the BoJ meeting on Thursday.
This, in turn, will play a key role in influencing the next leg of a directional move for the USD/JPY pair. In the meantime, any meaningful pullback might continue to attract some buying at lower levels and remain limited amid absent relevant market-moving economic releases from the US on Monday.