Japanese Yen consolidates against USD amid mixed cues, ahead of central bank events

• The Japanese Yen struggles for a firm near-term direction amid mixed fundamental cues.

• Political and BoJ rate-hike uncertainties, along with a positive risk tone, weigh on the JPY.

• Fed rate cut bets undermine the USD and cap USD/JPY ahead of key central bank events.

The Japanese Yen (JPY) extends its sideways consolidative price move against a broadly weaker US Dollar (USD) through the Asian session on Tuesday as traders opt to wait for this week's key central bank events. The Federal Reserve (Fed) is scheduled to announce the outcome of a two-day meeting on Wednesday, and will be followed by the crucial Bank of Japan (BoJ) decision on Friday. In the meantime, the uncertainty over the likely timing and the pace of BoJ rate hikes, along with the prevalent risk-on mood, acts as a headwind for the safe-haven JPY.

Any meaningful downside for the JPY, however, still seems elusive in the wake of the growing acceptance that the BoJ will stick to its policy normalization path. This marks a significant divergence in comparison to rising bets for a more aggressive easing by the Fed, which keeps the US Dollar depressed near its lowest level since July 24 and should contribute to capping 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 remains to the downside.

Japanese Yen bulls seem reluctant despite a supportive fundamental backdrop

The Japanese Yen has been struggling for a firm near-term direction over the past week or so and oscillating in a range against its American counterpart amid ambiguity over the Bank of Japan rate hike decision. Japanese Prime Minister Shigeru Ishiba's resignation added a layer of uncertainty in the markets and could give the BoJ more reasons to go slow on interest rate hikes.

Meanwhile, the US-Japan trade deal has removed some risks to domestic growth. The BoJ sees the development paving the way for steady progress toward the inflation target. Moreover, a tight labor market and optimistic economic outlook keep the door open for an imminent BoJ interest rate hike by the end of this year and offer some support to the JPY.

Moreover, the current market pricing points to a nearly two full 25-basis-point rate hikes by July next year, which, in turn, warrants some caution before placing aggressive JPY bearish bets. Traders might also opt to wait on the sidelines ahead of the latest BoJ monetary policy update on Friday. This, along with a bearish US Dollar, should cap the USD/JPY pair.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, languishes near its lowest level since July 24 amid rising bets for a more aggressive policy easing by the US Federal Reserve. Traders ramped up their bets for three interest rate cuts by the Fed this year after the recent US macroeconomic data pointed to signs of a softening labor market.

The US Senate voted to confirm Stephen Miran – one of US President Donald Trump’s top economic advisers – to join the Fed's powerful Board of Governors. Miran will now be voting on this week's interest rate decision. A federal appeals court ruled that Trump cannot fire Fed Governor Lisa Cook, who can participate in the pivotal two-day meeting starting Tuesday.

On the geopolitical front, Trump said on Monday that a face-to-face meeting between Ukrainian President Volodymyr Zelenskyy and his Russian counterpart, Vladimir Putin, is difficult. This comes amid the intensifying Russia-Ukraine war and brewing Middle East tensions, which could further benefit the safe-haven JPY ahead of the key central bank events.

Tuesday's US economic docket features the release of US monthly Retail Sales figures and Industrial Production data later during the North American session. The immediate market reaction is more likely to be muted as traders might refrain from placing aggressive directional bets and opt to wait for more cues about the central banks' policy outlook.

USD/JPY needs to find acceptance below 147.00 to back the case for further losses

The range-bound price action might be seen as a consolidation phase before the next leg of a directional move. Meanwhile, the recent repeated failures near a technically significant 200-day Simple Moving Average (SMA) suggest that the path of least resistance for the USD/JPY pair is to the downside. That said, it will still be prudent to wait for some follow-through selling and acceptance below the 147.00 mark before positioning for further losses amid neutral oscillators on the daily chart. Spot prices might then accelerate the fall towards the 146.30-146.20 horizontal support. This is closely followed by the 146.00 round figure, below which the downward trajectory could extend further towards the 145.35 intermediate support en route to the 145.00 psychological mark.

On the flip side, any positive move up is likely to confront an immediate hurdle near the 148.00 round figure, above which a bout of short-covering could lift the USD/JPY pair to the 200-day Simple Moving Average (SMA) barrier, currently pegged near the 148.75 zone. Some follow-through buying, leading to a subsequent strength beyond the 149.00 mark and the monthly swing high, around the 149.15 region, would negate the negative outlook and shift the near-term bias in favor of bullish traders.