Japanese Yen ticks higher against a broadly weaker USD; lacks bullish conviction

• The Japanese Yen lacks a firm intraday direction amid the holiday-thinned liquidity on Monday.
• The uncertainty over the timing of the next BoJ rate hike keeps the JPY bulls on the defensive.
• Rising Fed rate cut bets undermine the USD and act as a headwind for the USD/JPY pair.

The Japanese Yen (JPY) ticks higher against a broadly weaker US Dollar (USD) during the Asian session on Monday, though it lacks bullish conviction amid mixed Bank of Japan (BoJ) rate hike cues. Worries about the potential negative impact of higher US tariffs, along with domestic political uncertainty, suggest that prospects for BoJ rate hikes could be delayed further. The central bank, however, reiterated in July that it will raise interest rates further if growth and inflation continue to advance in line with its estimates.

Meanwhile, the BoJ’s relatively 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, fails to assist the USD to capitalize on Friday’s modest gains and offers some support to the lower-yielding JPY, capping the USD/JPY pair near the 147.75-147.80 hurdle. That said, the risk-on mood acts as a headwind for the safe-haven JPY amid relatively thin liquidity on the back of a bank holiday in Japan.

Japanese Yen draws some support from divergent BoJ-Fed policy expectations

• The Japanese Yen consolidates in a range during the Asian session on Monday amid the uncertainty over the likely timing of the next interest rate hike by the Bank of Japan (BoJ). In fact, the central bank left the door open for further policy normalization at the end of the July policy meeting. However, BoJ’s Summary of Opinions showed on Friday that policymakers remain worried about the potential negative impact of higher US tariffs on the domestic economy, tempering expectations for an immediate rate hike.
• Major Asian indices, along with US equity futures, crept higher at the start of a new week. This turns out to be another factor undermining the safe-haven JPY. Investors, however, remain on edge amid the looming US tariff deadline on China, due to expire on Tuesday. Meanwhile, US President Donald Trump and Russian leader Vladimir Putin will meet in Alaska on Friday to discuss Ukraine. This might further contribute to keeping a lid on the market optimism and hold back traders from placing aggressive directional bets.
• The US Dollar attracts fresh sellers and erases a major part of Friday’s modest recovery gains amid rising bets for more interest rate cuts by the Federal Reserve. The expectations were reaffirmed by Fed Governor Michelle Bowman’s dovish remarks on Saturday, saying that three interest rate cuts will likely be appropriate this year. Bowman added that the apparent weakening in the labor market outweighs the risks of higher inflation to come. Traders are currently pricing in a nearly 90% chance of a rate cut in September.
• There isn’t any relevant market-moving economic data due for release from the US on Monday, leaving the USD at the mercy of comments from influential FOMC members. The focus, meanwhile, will remain glued to the latest US consumer inflation figures on Tuesday. Apart from this, the preliminary Q2 GDP print from Japan and the US Producer Price Index on Thursday could provide a fresh impetus to the USD/JPY pair. The mixed fundamental backdrop, however, warrants caution before positioning for a firm near-term direction.

USD/JPY remains confined in a one-week-old range; 147.75-147.80 holds the key

Spot prices remain confined in a familiar range held over the past week or so, forming a rectangle pattern and pointing to a consolidation phase amid neutral technical indicators on hourly/daily charts. Hence, it will be prudent to wait for a sustained move and acceptance above the 147.75-147.80 barrier, representing the 38.2% Fibonacci retracement level of the upswing in July, before positioning for any further gains. Some follow-through buying beyond the 148.00 mark would be seen as a key trigger for bulls and lift the USD/JPY pair to the 148.45-148.50 region. The momentum could extend further towards the 23.6% Fibo. retracement level, just ahead of the 149.00 mark.

On the flip side, the 147.00 round figure now seems to protect the immediate downside ahead of the 146.80-146.75 confluence – comprising the 200-period Simple Moving Average (SMA) on the 4-hour and the 50% Fibo. retracement level. A convincing break below should pave the way for deeper losses and drag the USD/JPY pair to sub-146.00 levels, or the 61.8% Fibo. retracement level. Spot prices could extend the slide further and eventually drop to the 145.00 psychological mark.