Japanese Yen bounces off two-week low against USD; focus remains on Fed/BoJ meetings

The Japanese Yen (JPY) recovers a few pips from an over two-week high, touched against its American counterpart earlier this Monday, though the upside potential seems limited. Data released earlier today showed that Japan’s service-sector inflation rose again in September and reinforced bets for an imminent rate hike by the BoJ. This marks a significant divergence in comparison to the growing acceptance that the US Federal Reserve (Fed) will lower borrowing costs two more times this year, and lends some support to the lower-yielding JPY.

Meanwhile, Japan's new Prime Minister Sanae Takaichi is expected to pursue expansionary spending and resist early tightening. This, along with economic uncertainty in the US, has been fueling speculations that the BoJ could delay raising rates further and might hold back the JPY bulls from placing aggressive bets. Traders might also opt to move to the sidelines ahead of this week's key central bank event risks – the outcome of a two-day FOMC meeting on Wednesday and the highly-anticipated BoJ monetary policy update on Thursday.

Japanese Yen bears turn cautious amid divergent BoJ-Fed policy expectations

• Data released earlier this Monday showed that Japan's Services Producer Price index perked up for the second straight month in September and accelerated to 3.0% from a 2.7% gain in August. With consumer inflation in Japan exceeding the Bank of Japan's 2% target for well over three years, the latest figures back the case for further policy tightening by the central bank, though it does little to boost the Japanese Yen.
• Japan’s new Prime Minister Sanae Takaichi, a fiscal and monetary dove, is seen as the successor of the former Premier Shinzo Abe's economic policies and is known for her pro-stimulus stance. This has been fueling concerns about Japan’s fiscal health and clouds the outlook for further BoJ policy tightening, which, in turn, is holding back the JPY bulls from placing aggressive bets and keep a lid on further gains.
• The US Bureau of Labor Statistics reported on Friday that the headline Consumer Price Index rose by 0.3% in September, putting the annual inflation rate at 3%. Excluding food and energy, the gauge showed a 0.2% monthly gain and an annual rate stood at 3%. The reading fell short of consensus estimates and reaffirmed market bets for an imminent interest rate cut by the US Federal Reserve later this week.
• Traders are also pricing in a greater chance of another rate reduction at the December FOMC policy meeting, which, in turn, fails to assist the US Dollar to capitalize on Friday's goodish rebound from a one-week low. Moreover, the divergent BoJ-Fed policy expectations could offer some support to the lower-yielding JPY and cap the upside for the USD/JPY pair ahead of this week's key central bank events.
• The US Fed is scheduled to announce its decision at the end of a two-day policy meeting on Wednesday, and will be followed by the BoJ policy update on Thursday. The outlooks will play a key role in determining the next leg of a directional move for the USD/JPY pair.
• On the trade-related front, top Chinese and US economic officials on Sunday have agreed on the framework of a potential trade deal that will be discussed when US President Donald Trump and Chinese President Xi Jinping meet later this week. This helps ease worries about an all-out trade war between the world's two largest economies, which could undermine the JPY's safe-haven status.

USD/JPY needs to surpass the 153.25-153.30 supply zone to back the case for further gains

From a technical perspective, some follow-through buying beyond the 153.25-153.30 region, or the highest level since February, touched earlier this month, will be seen as a fresh trigger for the USD/JPY bulls. Given that oscillators on the daily chart have been gaining positive traction and are still away from being in the overbought territory, spot prices might then aim towards reclaiming the 154.00 round figure. The momentum could extend further towards the next relevant hurdle near mid-154.00s en route to the 154.75-154.80 region and the 155.00 psychological mark.

On the flip side, the Asian session low, around the 152.65 zone, could act as an immediate support, below which the USD/JPY pair could slide to the 152.25 intermediate support en route to the 152.00 mark. A convincing break below the latter could negate the positive outlook and prompt some technical selling, paving the way for deeper losses towards the 151.10-151.00 support.