Forex Fundamental Analysis – Bank of Japan policy uncertainty and a weak domestic economy continue to undermine the Japanese yen



The USD/JPY pair has risen for the third consecutive day, marking the fourth day of positive movement in the previous five. It reached a one-week high near 157.25 during Tuesday’s Asian session. However, spot prices remain below the 157.65-157.70 supply zone, as traders remain cautious ahead of this week’s release of key macroeconomic data from the US and risks from central bank actions.

The release of US consumer inflation data on Wednesday will be followed by the long-awaited FOMC monetary policy decision. Investors will be looking for clues about the likely timing of when the Federal Reserve (Fed) will start cutting interest rates. This, in turn, will play a key role in influencing USD price action in the near term and will provide meaningful momentum to the USD/JPY pair ahead of the Bank of Japan’s (BoJ) decision on Friday.

Market participants remain unconvinced that the Japanese central bank will announce a reduction in monthly government bond purchases amid a weakening economy. On Monday, the Finance Ministry reported that the economy contracted 0.5 per cent in the first quarter and 1.8 per cent year-on-year. This, along with a stable performance in stock markets, is seen to undermine the Japanese Yen (JPY) and is becoming a key factor weighing on the USD/JPY pair.

Conversely, the US dollar is at its highest level since 14 May, reached on Monday, and continues to receive support from growing expectations that the Federal Reserve (Fed) may keep interest rates on hold for longer. These expectations were fuelled by stronger-than-expected US employment data released on Friday. This, in turn, favours the US dollar bulls and supports the prospects for the US dollar to continue its recent rise from the 50-day simple moving average (SMA).

Trade recommendation: Trade mainly buy orders at the price level of 157.50. We consider sell orders at the price level of 157.00.

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