The divergence in Fed and BoJ policy expectations proved to be a key factor putting pressure on the pair | 13 September 2024

USDJPY:

The USD/JPY pair weakened further below the mid 141.00s during the Asian session on Friday and is now back closer to the YTD low reached earlier this week. Moreover, the fundamental backdrop seems to be leaning in favor of bearish traders and supports the prospects of a continuation of the established downtrend seen over the past two months.

The US Dollar (USD) fell to a fresh weekly low amid rising bets for more aggressive Federal Reserve (Fed) policy easing next week, bolstered by the release of a softer-than-expected US Producer Price Index (PPI) on Wednesday. In fact, markets are now pricing in a more than 40% probability that the US central bank will cut borrowing costs by 50 basis points at the end of its September meeting. This keeps US Treasury yields near 2024 lows, which puts pressure on the dollar and leads to a decline in the USD/JPY pair.

The Japanese Yen (JPY), on the other hand, continues to receive support from hawkish signals from the Bank of Japan (BoJ) indicating that it will raise interest rates further if the economic outlook matches forecasts. Moreover, BoJ board member Naoki Tamura said on Thursday that the road to ending soft policy is still very long. This represents a significant divergence from dovish Fed expectations, which in turn encourages further pullback in Japanese Yen (JPY) and contributes to the tone of the USD/JPY pair.

The aforementioned fundamental backdrop indicates that the path of least resistance for spot prices remains to the downside, although traders may prefer to move sideways ahead of a key central bank event that could occur next week. The Fed is due to announce its decision at the end of its two-day meeting next Wednesday. This will be followed by the BOJ's policy update on Friday, which will determine the next leg of directional movement for the USD/JPY pair. Nevertheless, the pair remains on track to end the second week in the negative.

Trading recommendation: Trade predominantly with Sell orders from the current price level.

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