USD/JPY consolidates near mid-145.00s, just below YTD peak set on Tuesday

The USD/JPY pair holds steady around mid-145.00s during the Asian session on Wednesday and remains well within the striking distance of its highest level since November 2022 touched the previous day.

The US Dollar (USD) consolidates its recent strong gains to over a two-month top and continues to draw support from expectations that the Federal Reserve (Fed) will keep interest rates higher for longer. The bets were lifted by the stronger US data released on Tuesday, which showed that Retails Sales grew 0.7% on a monthly basis in July as compared to the previous month's upwardly revised reading of 0.3% and the 0.4% rise anticipated.

Furthermore, sales excluding autos increased by a robust 1%, again beating market estimates and recording the best monthly gains since January. This indicated that consumer spending held up well in July and pointed to an extremely resilient US economy, which should allow the Fed to stick to its hawkish stance. This, in turn, is seen underpinning the Greenback and acting as a tailwind for the USD/JPY pair, though the upside remains capped.

A 20 points slump in Empire State Manufacturing to a reading of -19 in August reinforced speculations that the Fed will pause its rate-hiking cycle at the next policy meeting in September. This, in turn, holds back the USD bulls from placing aggressive bets. Apart from this, fears of a possible intervention by Japanese authorities to curb any further fall in the domestic currency contribute to keeping a lid on the USD/JPY pair, at least for the time being.

That said, a more dovish stance adopted by the Bank of Japan (BoJ), which is the only major central bank in the world to maintain a negative benchmark interest rate, should cap any meaningful gains for the Japanese Yen (JPY). Adding to this, the recent widening of the US-Japan rate differential, led by bets for one more 25 bps Fed rate hike by the end of this year, supports prospects for a further near-term appreciating move for the USD/JPY pair.

Market participants now look to the US economic docket, featuring the release of Building Permits, Housing Starts and Industrial Production figures. This might influence the USD price dynamics and provide some impetus to the USD/JPY pair. The focus, however, will remain glued to the FOMC meeting minutes, which will play a key role in driving the USD demand in the near term and help determine the next leg of a directional move for the major.

Technical levels to watch