Japanese Yen flat lines against USD as trader await Fed and BoJ policy decisions

The Japanese Yen (JPY) extends its sideways consolidative price move against a bearish US Dollar (USD) and remains confined in a familiar range held over the past month or so through the early European session on Monday. The recent political turmoil in Japan fueled the uncertainty over the likely timing and the pace of interest rate hikes by the Bank of Japan (BoJ). This, along with a generally positive tone around the equity markets, undermines the safe-haven JPY. The downside, however, remains limited as investors seem convinced that the BoJ will stick to its policy normalization path.

Meanwhile, hawkish BoJ expectations mark a significant divergence in comparison to rising bets for a more aggressive policy easing by the Federal Reserve (Fed). This keeps the USD depressed near its lowest level since July 24 and benefits the lower-yielding JPY, suggesting that the path of least resistance for the USD/JPY pair is to the downside. Traders, however, seem reluctant and opt to move to the sidelines ahead of this week's key central bank event risks. The Fed is scheduled to announce its policy decision on Wednesday, and will be followed by the BoJ policy update on Friday.

Japanese Yen traders opt to wait for the crucial Fed, BoJ policy meetings this week

• Japanese Prime Minister Shigeru Ishiba's decision to resign earlier this month adds a layer of uncertainty over the future political landscape and government policies. This could give the Bank of Japan more reasons to delay its next interest rate hike, which keeps the Japanese Yen bulls on the back foot.
• Meanwhile, the recent US-Japan trade agreement has eliminated a key source of uncertainty. Moreover, an upward revision of Japan's Q2 GDP growth figures, along with a tight labor market and a rise in real wages for the first time in seven months, backs the case for another rate hike by the BoJ this year.
• The US called for further sanctions on Russia and possible tariffs on countries that they consider enabling its war in Ukraine in a call with the Group of Seven allies on Friday. This comes after Russian drones were downed by a NATO member, Poland, and Ukraine intensified drone strikes on Russian oil facilities.
• Meanwhile, an Iranian lawmaker, Mojtaba Zarei, has called on Qatar to expel US forces and host Iranian Revolutionary Guard hypersonic missiles to counter Israeli threats. This keeps geopolitical risks in play ahead of an Arab-Islamic leaders summit in Doha and offers some support to the safe-haven JPY.
• The US Dollar, on the other hand, hangs near its lowest level since July 24 amid the growing acceptance that the US Federal Reserve will lower borrowing costs this week. Moreover, the markets are pricing in a more aggressive policy easing by the Fed, which further lends support to the lower-yielding JPY.
• Traders, however, opt to move to the sidelines ahead of the key central bank event risks – the highly anticipated FOMC rate decision and a two-day BoJ meeting starting on Thursday. The latest monetary policy updates will play a key role in determining the next leg of a directional move for the USD/JPY pair.

USD/JPY technical setup backs case for imminent breakdown through short-term trading range

The range-bound price action constitutes the formation of a rectangle and points to indecision over the USD/JPY pair's near-term trajectory. Furthermore, neutral oscillators warrant some caution before placing directional bets. Meanwhile, the recent repeated failures near a technically significant 200-day Simple Moving Average (SMA) back the case for an imminent break to the downside. Some follow-through selling below the 147.00 mark will reaffirm the negative bias and expose the 146.30-146.20 horizontal support. This is closely followed by the 146.00 round figure, below which spot prices could accelerate the fall towards the 145.35 intermediate support en route to the 145.00 psychological mark.

On the flip side, any intraday move up is likely to confront an immediate hurdle near the 148.00 round figure, above which a fresh bout of short-covering could lift the USD/JPY pair to the 200-day Simple Moving Average (SMA) barrier, currently pegged near the 148.75 zone. Some follow-through buying, leading to a subsequent strength beyond the 149.00 mark and the monthly swing high, around the 149.15 region, would negate the negative outlook and shift the near-term bias in favor of bullish traders.