USD/JPY is caught between a cautious Bank of Japan and a Fed that is signaling tight policy. High energy prices and the risk of Japanese intervention limit the pair's upside. The BoJ's 30 October meeting and Fed signals are the next catalysts.
The Bank of Japan acknowledges the possibility of another rate hike and may raise its inflation forecast for the next financial year because of persistently high energy prices. The policy rate is likely to remain at 1.25% at the 30 October meeting, although a further increase in December cannot be ruled out. That could provide support for the yen.
Fed stance limits yen gains
Fed Chair Kevin Warsh continues to point to insufficient monetary policy restraint in the fight against inflation. Markets are assessing the prospect of further rate hikes, which could support the US dollar and limit any strengthening of the yen.
However, a weak yen raises the cost of imported goods and energy for Japan. A sharp depreciation of the currency could therefore increase the likelihood of action by the Japanese authorities, which could lead to a rapid strengthening of the yen.
USD/JPY holds an upward structure above 158.00
On the H4 chart, USD/JPY maintains an upward structure after recovering from a local low around 153.00. Consolidation above an equilibrium area around 158.22 led to a move towards 158.58, but further gains slowed.
The market still has potential for a corrective decline towards 158.00, followed by a new upward wave. If that support holds, the main target is 159.47, and if upward momentum develops, the next target is 160.06. A close below 158.00 would require revising the upward scenario.
The fundamental backdrop for USD/JPY remains moderately positive for the dollar, but the possibility of a Japanese rate hike this year and the risk of intervention limit the pair's further upside potential.
Source: ActionForex
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