USD/JPY edges higher amid a pickup in USD demand, lacks follow-through buying

The USD/JPY pair attracts some dip-buying near the 142.80 area on Friday and steadily climbs to a fresh daily high during the early European session. The pair is currently trading around the 142.65-142.70 area and draws support from a goodish pickup in demand for the US dollar.

The stronger US CPI report released on Tuesday lifted bets for a more aggressive policy tightening by the Fed, which continues to underpin the greenback and acts as a tailwind for the USD/JPY pair. In fact, the markets have started pricing in the possibility of a full 100 bps rate hike at the upcoming FOMC meeting on September 20-21 and another supersized 75 bps increase in November.

The Bank of Japan, on the other hand, has been lagging behind other major central banks in the process of policy normalisation and remains committed to continuing with its monetary easing. The resultant Fed-BoJ policy divergence is seen weighing on the Japanese and turns out to be another factor lending some support to the USD/JPY pair. The uptick, however, lacks bullish conviction.

The prospects for rapid interest rate hikes, along with headwinds stemming from fresh COVID-19 curbs in China and the protracted Russia-Ukraine war, have been fueling recession fears. This, in turn, tempers investors' appetite for riskier assets, which is evident from a fresh leg down in the equity markets. The anti-risk flow benefits the safe-haven JPY and caps gains for the USD/JPY pair.

Traders also seem reluctant and prefer to move to the sidelines ahead of next week's central bank event risks. The Fed is scheduled to announce its policy decision on Wednesday, which will be followed by the Bank of Japan meeting on Thursday. This will play a key role in influencing near-term price dynamics for the USD/JPY pair and help determine the next leg of a directional move.

In the meantime, traders on Friday will take cues from the Preliminary Michigan Consumer Sentiment Index from the US, due for release later during the early North American session. This, along with the 
US bond yields, will drive the USD demand. Apart from this, the broader market risk sentiment should produce short-term trading opportunities around the USD/JPY pair on the last day of the week.

Technical levels to watch