JPY recovers modest Asian session losses amid hawkish BoJ expectations

• The Japanese Yen reverses a major part of the modest Asian session downtick amid BoJ rate hike bets.
• Dovish Fed expectations keep the USD bulls on the defensive and benefit the lower-yielding JPY.
• Receding safe-haven demand caps any further JPY appreciation and supports the USD/JPY pair.

The Japanese (JPY) attracts some dip-buyers following an Asian session downtick on Tuesday and moves back closer to over a one-week high touched against its American counterpart the previous day. The growing acceptance that the Bank of Japan (BoJ) will raise interest rates again in 2025 turns out to be a key factor that continues to act as a tailwind for the JPY. The US Dollar (USD), on the other hand, struggles to attract buyers amid bets that the Federal Reserve (Fed) will lower borrowing costs further and drags the USD/JPY pair back below the 145.00 psychological mark.

Meanwhile, a surprise downgrade of the US government’s credit rating on Friday appeared to have a modest impact on the global risk sentiment. This is evident from a generally positive tone around the equity markets, which caps gains for the safe-haven JPY and acts as a tailwind for the USD/JPY pair. Nevertheless, the fundamental backdrop seems tilted in favor of the JPY bulls and suggests that the path of least resistance for the currency pair is to the downside. Traders now look to speeches from influential FOMC members for some impetus in the absence of relevant macro data.

Japanese Yen bulls have the upper hand amid BoJ rate hike bets

• Investors looked past Moody’s downgrade of the US sovereign credit rating to “Aa1” from “Aaa” on Friday amid rising trade optimism, which, in turn, prompts fresh selling around the safe-haven Japanese Yen during the Asian session on Tuesday.
• The US and China agreed to significantly lower tariffs and initiated a 90-day pause to finalize a broader deal, which marked the de-escalation of a disruptive standoff between the world’s two largest economies and boosted the global risk sentiment.
• Bank of Japan Deputy Governor Shinichi Uchida said on Monday that Japan’s underlying inflation is likely to re-accelerate after a period of slowdown and that the central bank will keep raising interest rates if the economy, prices improve as projected.
• Moreover, the BoJ’s Summary of Opinions from the last meeting revealed that policymakers haven’t given up on hiking interest rates further, and some board members saw scope to resume rate hikes if developments over US tariffs stabilise.
• Japan’s Finance Minister Katsunobu Kato hinted at plans to speak with US Treasury Secretary Bessent on FX at the G7 finance leaders’ meeting later this week. However, Kyodo News reported that Bessent, is not expected to attend the meeting.
• The US Consumer Price Index (CPI) and the Producer Price Index (PPI) released last week pointed to signs of easing inflation, while the disappointing US monthly Retail Sales data increased the likelihood of several quarters of sluggish growth.
• Two Fed officials –New York Fed President John Williams and Atlanta Fed President Raphael Bostic – suggested on Monday that policymakers may not lower interest rates before September on the back of a murky economic outlook.
• Moreover, Fed Vice Chair Philip Jefferson also backed a wait-and-see approach and warned against temporary price increases becoming sustained inflation. Investors, however, are still pricing in two 25-basis-point rate cuts by the year-end.
• Trump announced on his Truth Social platform that Russia and Ukraine have agreed to start negotiations towards a ceasefire immediately and stressed that the conditions of the bilateral talks will be negotiated between the two parties directly.
• The Israeli military announced that it had begun extensive ground operations in an expanded offensive against Hamas and issued evacuation orders to people in the southern city of Khan Yunis – the second-largest city in Gaza.
• This keeps geopolitical risks in play and should limit any meaningful JPY depreciation, warranting caution before placing fresh bullish bets around the USD/JPY pair and confirming that a one-week-old downtrend has run its course.

USD/JPY seems vulnerable while below the 38.2% Fibo. level

From a technical perspective, acceptance below the 38.2% Fibonacci (Fibo.) retracement level of the April-May upward move and negative oscillators on hourly charts favor the USD/JPY bears. Hence, any subsequent move up might still be seen as a selling opportunity and remain capped ahead of the 146.00 round figure. A sustained strength beyond the latter, however, might trigger a short-covering move and lift spot prices to the 146.60 area, or the 23.6% Fibo. level, en route to the 147.00 mark.

On the flip side, the 144.65 area, or over a one-week low touched on Monday, now seems to protect the immediate downside. This is closely followed by the 144.30-144.25 confluence, comprising the 200-period Simple Moving Average (SMA) on the 4-hour chart and the 50% retracement level. A convincing break below will be seen as a fresh trigger for bearish traders and drag the USD/JPY pair below the 144.00 mark, towards the next relevant support near the 143.75-143.70 region.