USD/JPY retreats over 50 pips from Asian session peak, dips below mid-year 147.00s

• USD/JPY is gaining positive traction on Monday, although it is struggling to capitalize on the move.
• Divergent BoJ-Fed policy expectations are proving to be a key factor limiting further gains.
• A positive risk tone undermines the safe JPY and could support the pair.

The USD/JPY pair is struggling to capitalize on its modest Asian session rally to the 148.00 mark and is falling to a new daily low in the last hour. Spot prices are currently trading just below the mid-147.00s and look vulnerable to extending Friday’s pullback from a two-week high.

The prevailing risk-on sentiment, supported by signs of easing recession fears in the US, is undermining the Japanese yen (JPY) and providing some support to USD/JPY amid a modest rise in the US dollar (USD). That said, rising geopolitical tensions in the Middle East are keeping optimism in the markets in check. In addition, divergent policy expectations from the Bank of Japan (BoJ) and the Federal Reserve (Fed) keep any significant upside for the currency pair in check.

Investors appear convinced that Thursday’s stronger Q2 Gross Domestic Product (GDP) report out of Japan could encourage the Bank of Japan (BoJ) to continue raising interest rates. Instead, the US central bank is almost certain to begin its policy easing cycle in September. Bets were reaffirmed by remarks by San Francisco Fed President Mary Daly that the US central bank must take a gradual approach to reducing borrowing costs.

The fundamental background mentioned above suggests that the path of least resistance for the USD/JPY pair is to the downside. Still, investors may prefer to wait for more clues about the Fed’s rate cut path before positioning for the next leg of a directional move. Therefore, the focus will remain on the release of the minutes of the FOMC meeting on Wednesday, which will be followed by Fed Chairman Jerome Powell’s speech at the Jackson Hole Symposium on Friday.