The USD/JPY pair is trying to find a reception above 1.00 and pull back from the weekly high this Wednesday. The pair slips below 13.00 in the middle of the European session, pressured by a recovery in demand for the safe haven Japanese yen, although it is no longer sold.
Market sentiment remains fragile amid fears that rapidly rising interest rates will lead to a deeper recession in the global economy. In addition, headwinds from China’s zero-incubation policy and the protracted war between Russia and Ukraine have heightened fears of an economic downturn. This, in turn, limits investors’ appetite for riskier assets and directs safe-haven flows to the yen.
The risk aversion flow is reinforced by a modest decline in US Treasury yields, which is seen as another bearish factor for the USD / JPY pair. However, a strong recovery in demand for the US dollar, supported by Fed expectations, should continue to support spot prices and help limit further losses in the face of the risks of key central bank events.
The Federal Reserve will announce its decision at the end of a two-day policy meeting on Wednesday, with another major rate hike of 75 basis points widely expected. Markets also seem confident that the US Federal Reserve will stick with its aggressive rate-hike cycle to curb inflation, which should be a tailwind for US bond yields and the dollar.
Consequently, the focus remains on the pasted up-to-date economic forecasts, the so-called plot point and Fed President Jerome Powell’s comments at the post-meeting press conference. Investors are looking for new clues about the path of future rates. This, in turn, plays a key role in influencing USD price dynamics and helps determine the near-term trajectory of the USD/JPY pair.
This will be followed by the meeting of the Bank of Japan on Thursday. The Bank of Japan remains committed to ultra-low interest rates and dovish policy. This marks a significant departure from the dovish stance of other major central banks, supporting views that the recent strong rally in USD/JPY will continue.