• USD/JPY is struggling to gain significant traction and remains confined to a narrow band.
  • The decline appears to be cushioned amid the policy divergence between the Fed and the BoJ and modest USD strength.
  • Investors are now awaiting the US NFP report on Friday before placing aggressive directional bets.

USD/JPY is struggling to capitalize on yesterday’s rebound from the 143.50 area to a 1.5 week low and is hovering in a narrow band on Thursday. The pair remains below the psychological 145.00 mark for the first half of the European session, although the bias still appears to be in favor of bullish traders.

A wide divergence in the policy stance adopted by the Bank of Japan and other major central banks could continue to undermine the Japanese yen. In fact, the Japanese central bank has lagged behind other major central banks in the process of policy normalization and remains committed to further monetary easing. This, combined with the emergence of some lower USD buying, supports the outlook for a significant rise in USD/JPY.

Recent hawkish remarks from several Fed officials have reaffirmed expectations that the US central bank will tighten monetary policy at a faster pace and continue to act as a tailwind for the USD. In fact, markets priced in the possibility of another 75 basis point Fed rate hike in November. This continues to support high US Treasury yields, widen the US-Japan rate spread and add credibility to the constructive outlook.

Japanese Finance Minister Shunichi Suzuki, however, said on Monday that the government was ready to intervene in currency markets to avoid greater losses in the national currency. This is seen as a key factor preventing traders from placing aggressive bullish bets around the USD/JPY pair. Investors also appear reluctant and could be waiting for further catalyst in the much-watched monthly U.S. employment details known as the NFP report on Friday.

In the meantime, the release of the US Initial Weekly Jobless Claims, speeches from FOMC officials and US bond yields will boost USD demand. Other than that, traders will take inspiration from the broader risk sentiment in the market, which could influence the safe-haven JPY and create short-term opportunities around the USD/JPY pair.

Technical levels to watch

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