Japanese Yen sticks to negative bias; looks to BoJ policy update for fresh impetus

The Japanese Yen (JPY) drifts lower for the second straight day on Thursday and retreats further from its highest level since July 7, touched against a broadly firmer US Dollar (USD) the previous day. Investors remain concerned that domestic political uncertainty could give the Bank of Japan (BoJ) more reasons to delay raising interest rates. This, along with the weaker-than-expected release of Core Machinery Orders data from Japan and a generally positive risk tone, is seen undermining the safe-haven JPY.

Traders, however, might refrain from placing aggressive bearish bets around the JPY and opt to wait for the outcome of a two-day BoJ policy meeting on Friday. Furthermore, the growing acceptance that the BoJ will stick to its policy normalization path marks a significant divergence in comparison to the US Federal Reserve's (Fed) dovish stance, which should limit losses for the lower-yielding JPY. Nevertheless, the post-FOMC USD recovery from its lowest level since February 2022 might still support the USD/JPY pair.

Japanese Yen bears seem reluctant amid divergent BoJ-Fed policy outlooks

• Government data released earlier this Thursday showed that Japan's Core Machinery Orders fell 4.6% month-over-month in July. On a yearly basis, private-sector orders eased from the 7.6% growth registered in June to 4.9% during the reported month. The readings were well below market expectations and weighed on the Japanese Yen during the Asian session.
• Meanwhile, the US Federal Reserve, as was expected, lowered borrowing costs for the first time since December 2024 and indicated that more rate cuts would follow through the end of this year amid the softening labor market. The US central bank lowered its benchmark rate by 25 basis points, to the 4.00%-4.25% range, and projected two more rate cuts in 2025.
• The initial market reaction faded quickly after Fed Chair Jerome Powell, while addressing reporters at the post-meeting press conference, said that risks to inflation are tilted to the upside. This prompted an aggressive US Dollar short-covering move and assisted the USD/JPY pair to recover over 150 pips from the 145.50-145.45 area, or the lowest level since July 7.
• Any meaningful JPY depreciation, however, seems elusive in the wake of the growing conviction that the BoJ will hike interest rates this year. In fact, the recent US-Japan trade deal has removed some risks to domestic growth. Moreover, the BoJ sees the development paving the way for steady progress toward achieving the 2% inflation target.
• Furthermore, a tight labor market and optimistic economic outlook keep the door open for an imminent BoJ interest rate hike. This, along with geopolitical risks stemming from the intensifying Russia-Ukraine war and conflicts in the Middle East, might hold back traders from placing aggressive bearish bets around the safe-haven JPY and limit losses.
• The market focus now shifts to a two-day BoJ meeting, starting this Thursday. The central bank will announce its decision on Friday and is widely expected to leave interest rates unchanged. Hence, investors will look for cues about the future policy outlook, which, in turn, will play a key role in influencing the near-term JPY price dynamics.
• In the meantime, traders will take cues from Thursday's US macro data – Weekly Initial Jobless Claims and the Philly Fed Manufacturing Index – to grab short-term opportunities later during the North American session.

USD/JPY needs to surpass 147.40-147.50 hurdle to back the case for additional gains

Wednesday's breakdown below the 146.30-146.20 horizontal support would now be categorized as a fakeout in the wake of the post-FOMC turnaround and the subsequent strength beyond the 147.00 mark on Thursday. However, oscillators on the daily chart are yet to confirm a positive outlook, suggesting that the USD/JPY pair is likely to confront stiff resistance near the 147.40-147.50 region. That said, a sustained strength beyond the said barrier has the potential to lift spot prices to the 148.00 mark en route to the 200-day Simple Moving Average (SMA), currently pegged near the 148.75 zone, the 149.00 mark, and the monthly high, around the 149.15 region.

On the flip side, any meaningful slide might continue to find some support near the 146.20 region ahead of the 146.00 mark. A convincing break below the latter would expose the overnight swing low, around the 145.50-145.45 region, below which the USD/JPY pair could accelerate the fall towards challenging the 145.00 psychological mark.