USD/JPY stays firmer around 109.50, ignores BOJ on upbeat sentiment before Fed

• USD/JPY holds onto recovery moves from weekly low, snaps two-day fall.
• BOJ keeps monetary policy unchanged, revises down economic outlook on virus woes.
• Market sentiment improves as PBOC tries to defend Evergrande, US debt limit debate clears the first hurdle.
• Fed tapering fears challenge bulls, geopolitics is also important for fresh impulse.

USD/JPY grinds higher around 109.45, up 0.18% on a day after the Bank of Japan (BOJ) announced the latest monetary policy decisions on early Wednesday.

The Bank of Japan (BOJ) matched wide market expectations of keeping the benchmark rate at -0.10%, also holding a 10-year Japanese Government Bond (JGB) yield target of around 0%, during the latest meeting. Even so, the Japanese central bank cited covid woes to weigh on the economic and export outlook.

Read: BOJ steers policy on a steady course in September

It should be noted that the recent positive headlines from China supersede the BOJ policymakers’ cautious optimism. Among them, the People’s Bank of China’s (PBOC) heavy liquidity injection, of around 110 billion yuan, joins Evergrande’s ability to pay coupons on the expiry date of September 23, which was previously feared, favor the risk-on mood.

Previously, the International Monetary Fund’s (IMF) Chief Economist Gita Gopinath also sounded optimistic over China’s ability to tame the fears emanating from the real-estate firm.  On the same line were hopes of the extension to the US debt limit expiry the House votes 217-207 to favor temporary government funding and debt limit increase debate.

On the contrary, Bloomberg’s news stating that the European Union (EU) and the US aim to pledge more enforcement to curb China's risk, adds to the market’s fears. Furthermore, the pre-Fed caution amid mixed data and previous hawkish policymakers’ comments keep traders waiting for the Federal Open Market Committee (FOMC) monetary policy meeting announcement. On the same line were news from Reuters quote the Asian Development Bank (ADB) as saying, “Developing Asia's economic rebound this year could be dented by the rapid spread of the Delta coronavirus variant.”

Amid these plays, S&P 500 Futures snap a four-day downtrend to print 0.15% intraday gains by the press time while the US 10-year Treasury yields fade initial strength around 1.32%. Further, the US Dollar Index (DXY) seesaws near 93.20.

Looking forward, headlines suggesting China’s another real-estate fund’s likely default and geopolitical fears concerning the West versus Beijing story may join the pre-Fed caution to weigh on USD/JPY prices. However, a positive surprise from the US Federal Open Market Committee (FOMC) monetary policy meeting announcement, mostly in the form of no tapering hints, may favor the bulls.

Read: Fed Preview: Three ways in which Powell could down the dollar, and none is the dot-plot

Technical analysis

Although a five-month-old ascending trend line, near 109.30, triggered USD/JPY rebound, a confluence of 50-day and 100-day Simple Moving Averages (DMAs) around 109.85 precedes two-week-old resistance line, close to 110.00, to challenge the pair buyers.