Japanese Yen gains modestly against USD as BoJ-Fed policy divergence persists

• The Japanese Yen attracts some intraday buyers on Tuesday, though it lacks follow-through.
  The divergent BoJ-Fed policy expectations offer some support to the lower-yielding JPY.
  Hopes for a Russia-Ukraine peace deal undermine and cap gains for the safe-haven JPY.

The Japanese Yen (JPY) recovers slightly from a four-day trough touched against a flattish US Dollar (USD) during the Asian session on Tuesday, though it lacks bullish conviction. The growing acceptance that the Bank of Japan (BoJ) will stick to its policy normalization path and hike interest rates by the year-end acts as a tailwind for the JPY. Apart from this, the cautious market mood is seen as another factor underpinning the JPY’s safe-haven status and fails to assist the USD/JPY pair to capitalize on its modest intraday uptick to levels beyond the 148.00 mark.

Meanwhile, the BoJ’s hawkish outlook marks a significant divergence in comparison to expectations that the Federal Reserve (Fed) will resume its rate-cutting cycle in September. This, in turn, keeps a lid on any meaningful upside for the USD and further benefits the lower-yielding JPY. However, hopes for a Russia-Ukraine peace deal cap the JPY. Traders also seem reluctant and opt to wait for more cues about the Fed’s rate-cut path. Hence, the focus will remain glued to FOMC Minutes on Wednesday and Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium.

Japanese Yen bulls remain on the sidelines amid mixed fundamental cues

• The Bank of Japan revised its inflation forecast at the end of the July meeting and reiterated that it will raise interest rates further if growth and inflation continue to advance in line with its estimates. Adding to this, data released last week showed that Japan’s economy expanded more than expected in the second quarter despite US tariff headwinds, keeping the door open for an imminent BoJ rate hike by the end of this year.
• Meanwhile, traders tempered their bets for more aggressive policy easing by the Federal Reserve amid signs of momentum in price pressures. However, the CME Group’s FedWatch Tool indicated a nearly 85% chance that the US central bank would lower borrowing costs in September. Moreover, the possibility of two 25 basis points rate cuts by the Fed in 2025 marks a significant divergence in comparison to the BoJ’s hawkish outlook.
• On the geopolitical front,  US President Donald Trump announced on Monday that he had begun preparations for a face-to-face meeting between Russian President Vladimir Putin and Ukrainian President Volodymyr Zelensky. This followed a summit with Zelensky and the European leaders earlier in the day, fueling hopes for an early peace deal to end Europe’s deadliest war in 80 years and denting demand for safe-haven assets.
• The ruling Liberal Democratic Party’s loss in Japan’s upper house election in July adds a layer of uncertainty amid concerns about the potential negative impact of higher US tariffs on the domestic economy. This, in turn, suggests that the prospects for the BoJ rate hike could be delayed, which, so far, has held back traders from placing bullish bets around the Japanese Yen and might continue to act as a tailwind for the USD/JPY pair.
• Tuesday’s US economic docket features the release of housing market data – Building Permits and Housing Starts. This, along with speeches by influential FOMC members, might provide some impetus to the USD. The focus, however, will remain glued to FOMC meeting Minutes on Wednesday and Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium, which will be looked for cues about the future rate-cut path.
• Apart from this, traders this week will confront the release of the flash global PMIs on Thursday, which might contribute to infusing volatility in the financial markets and providing some meaningful impetus to the USD/JPY pair. Meanwhile, the aforementioned mixed fundamental backdrop warrants some caution before positioning for a firm near-term direction.

USD/JPY remains confined in range; struggles to find acceptance above 148.00

The USD/JPY pair’s range-bound price action witnessed over the past two weeks or so might be categorized as a consolidation phase amid neutral technical indicators on the daily chart. Hence, it will be prudent to wait for an eventual break on either side before positioning for the next leg of a directional move.

Meanwhile, a sustained strength and acceptance above the 148.00 mark would be seen as a key trigger for the USD/JPY bulls. This should pave the way for gains towards the 148.55-148.60 region, or the 50% retracement level of the downfall from the monthly high, en route to the 149.00 round-figure mark.

On the flip side, any corrective slide could find decent support near the 147.10-147.00 area. A convincing break below could make the USD/JPY pair vulnerable to retest the multi-week low, around the 146.20 zone, touched last Thursday. A subsequent slide below the 146.00 mark might shift the bias in favor of bearish traders.