- USD/JPY struggled to sustain modest intraday gains to a one-month high hit on Monday.
- Recession fears, slide in U.S. bond yields support safe-haven yen , and become a headwind.
- Tough Fed expectations continue to support the dollar and should limit any meaningful slide.
USD/JPY gains traction for the fifth day in a row — It was also the seventh day of a positive move the previous day at eight – and climbed to a one-month high on Monday. However, momentum faltered ahead of the 137.50 area, forcing spot prices to give up most of their intraday gains and retreat below the 137.00 mark during the European morning.
Investors remain concerned about a global economic downturn, as evidenced by the generally weak tone in the stock market. This in turn provided some support for the safe-haven Japanese yen and acted as resistance for the USD/JPY pair. The risk aversion led to a slight decline in US Treasury yields, and the narrowing of the US-Japan interest rate spread, which further favored the yen. Having said that, continued dollar buying continues to provide some support for the major currencies.
In addition to this, monetary policy has diverged widely, with the stance taken by the Bank of Japan and the Federal Reserve in favor of the USD/JPY pair There is the prospect of some bargain hunting. It is worth mentioning that the Bank of Japan has repeatedly stated that it will retain its ultra-loose policy setting. In contrast, recent hawkish remarks from several Fed officials have once again confirmed market expectations that the Fed will continue to tighten monetary policy to curb inflation.
Still, market participants are divided on the size of the Fed’s next rate hike in September. As such, Fed Chairman Jerome Powell’s speech at the Jackson Hole Symposium on Friday will be seen as a clue about the central bank’s policy outlook. In addition to this, investors will be taking clues from this week’s important US macro data, which will influence the near-term USD price dynamics. This will help determine the next move for the USD/USD pair.
Meanwhile, traders are likely to avoid placing aggressive bets and leaning into the absence of relevant U.S. economic data on Monday to wait and see. Still, fundamentals appear to be firmly tilted toward bullish traders, suggesting that any meaningful dips could still be seen as buying opportunities and remain limited.
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