The USD/JPY pair kicked off the new week on a positive note, with fresh buyers showing interest during the Asian session on Monday. This led the pair to jump to the 154.35 region as traders engaged in repositioning trades ahead of key central bank events scheduled for later in the week.
A positive risk tone in the market has been denting the demand for the safe-haven JPY, which has in turn provided some support to the USD/JPY pair. With central bank decisions from the Bank of Japan (BoJ) and the Federal Reserve (Fed) looming on Wednesday, traders may opt to remain cautious and await further clarity before making significant moves.
The BoJ is anticipated to potentially reduce bond buying and raise interest rates, a move that contrasts sharply with the market’s expectations for the Fed. Investors have fully priced in the likelihood of the Fed embarking on a policy-easing cycle in September, with three interest rate cuts expected by the end of the year. This divergence in expectations between the two central banks could impact the trajectory of the USD/JPY pair in the coming days.
From a technical standpoint, the breakdown below the 100-day Simple Moving Average (SMA) last week was viewed as a bearish signal, prompting further selling pressure. However, the slightly oversold Relative Strength Index (RSI) on the daily chart led to some short-covering, indicating a potential shift in sentiment among traders.
The outlook for the USD/JPY pair remains cautiously optimistic as traders navigate through a complex web of central bank decisions and market expectations. While the positive risk tone has supported the pair in the short term, the diverging policies of the BoJ and the Fed could introduce additional volatility in the days ahead. It is advisable for traders to closely monitor developments and exercise prudent risk management strategies in light of the uncertain economic landscape.