USD/JPY REBOUNDS FROM 135.00 MARK, DOWNSIDE REMAINS CUSHIONED AHEAD OF FOMC MINUTES

• USD/JPY edged lower on Wednesday, though the downtick lacked follow-through selling.
• The Fed-BoJ policy divergence undermined the JPY and acted as a tailwind for the major.
• Traders also seemed reluctant and wait for the FOMC meeting minutes for a fresh impetus.

The USD/JPY pair extended the previous day’s modest pullback from a multi-day high, around the 136.35 region and witnessed some selling on Wednesday. Spot prices, however, managed to find support near the 135.00 psychological mark and quickly recovered a few pips from the daily low touched in the last hour.

The recent sharp decline in the US Treasury bond yields resulted in the narrowing of the US-Japan rate differential, which, in turn, offered some support to the Japanese yen. On the other hand, the US dollar was seen consolidating the overnight blowout rally to a fresh two-decade high. This, in turn, exerted some downward pressure on the USD/JPY pair, though a combination of factors helped limit any deeper corrective pullback.

Signs of stability in the equity markets capped any meaningful gains for the safe-haven JPY. Apart from this, a big divergence in the monetary policy stance adopted by the Bank of Japan and the Federal Reserve acted as a tailwind for the USD/JPY pair. It is worth recalling that the BoJ has repeatedly signalled that it would stick to its ultra-accommodative policy and pledged to keep borrowing costs at “present or lower” levels.

In contrast, Fed Chair Jerome Powell last week reaffirmed bets for more aggressive rate hikes and said that the US economy is well-positioned to handle tighter policy. Hence, the market focus will remain glued to the FOMC meeting minutes, due later this Wednesday. Investors will closely scrutinize the minutes for fresh clues about the Fed’s policy tightening path, which, in turn, should provide a fresh impetus to the USD/JPY pair.

Apart from this, Friday’s release of the closely-watched US monthly jobs report (NFP) will play a key role in influencing the near-term USD price dynamics. This, in turn, should help determine the next leg of a directional move for the USD/JPY pair. In the meantime, traders might prefer to wait on the sidelines and refrain from placing aggressive bets.