USD/JPY flat lines above mid-157.00s amid softer USD, bullish potential seems intact
■ USD/JPY is seen consolidating its recent gains registered over the past three days.
■ The divergent Fed-BoJ policy stance should continue to lend support to the major.
■ Any corrective decline could be seen as a buying opportunity and remain limited.
The USD/JPY pair struggles to capitalize on its gains registered over the past three days and oscillates in a narrow trading band, just above mid-157.00s during the Asian session on Tuesday. Spot prices, however, remain well within striking distance of the highest level since late April touched last Friday and seem poised to prolong the recent well-established uptrend.
Despite the Federal Reserve's (Fed) hawkish stance, the markets have been pricing in the possibility of two interest rate cuts this year amid signs of easing inflationary pressures in the United States (US). This keeps the US Dollar (USD) bulls on the defensive for the second straight day and turns out to be a key factor acting as a headwind for the USD/JPY pair. Moreover, speculations that Japanese authorities might intervene to prop up the Japanese Yen (JPY) further contribute to capping the currency pair.
Meanwhile, Fed officials continue to argue in favor of one interest rate cut in 2024. In fact, Philadelphia Fed President Patrick Harker said on Monday that keeping rates where they are for a bit longer will help get inflation down and mitigate upside risks. This remains supportive of elevated US Treasury bond yields and might limit the USD losses. Furthermore, the Bank of Japan's (BoJ) cautious policy approach should cap any meaningful JPY appreciating move and lend some support to the USD/JPY pair.
The aforementioned fundamental backdrop seems tilted firmly in favor of bulls and suggests that the path of least resistance for spot prices remains to the upside. Hence, a corrective decline might still be seen as a buying opportunity as traders now look to the US macro data – monthly Retail Sales and Industrial Production figures. This, along with speeches by influential FOMC members, should provide some impetus to the USD/JPY pair ahead of the BoJ policy meeting minutes on Wednesday.
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