USD/JPY slips further below 142.00 on weaker USD, focus remains on Fed decision

• USD/JPY encounters fresh supply and reverses some of the overnight recovery gains.
• Divergent Fed-BoJ policy expectations support the JPY and exert some pressure.
• Investors are eyeing the Fed’s critical decision ahead of the BoJ’s key policy update on Friday.

USD/JPY attracts fresh sellers during the Asian session on Wednesday and slips back below 142.00 in the last hour, eroding some of the overnight gains and halting its recovery from the July 2023 low reached early this week. Meanwhile, the fundamental context suggests the path of least resistance for spot prices is to the downside, although traders may refrain from placing aggressive bets ahead of key central bank risks.

The Federal Reserve (Fed) is scheduled to announce its decision at the end of a two-day meeting later this Wednesday and is widely expected to kick off its policy easing cycle. Market attention will then shift to the Bank of Japan’s (BoJ) policy update on Friday, which will play a key role in influencing the Japanese yen (JPY) and provide further directional impetus to the USD/JPY pair. Meanwhile, cautious market sentiment coupled with diverging Fed-BoJ policy expectations is driving some safe-haven flows to the JPY and is proving to be a key factor putting downward pressure on the USD/JPY pair.

Markets priced in a higher chance of a 50 basis point (bps) interest rate cut by the Fed amid signs of easing inflationary pressures. This overshadows Tuesday’s better-than-expected release of US retail sales data and fails to help the US dollar (USD) build on its overnight rebound from the 2024 low. Instead, recent signals from officials The BoJ suggests the Japanese central bank will raise interest rates again by the end of this year. This has been a key factor behind the recent relative performance of the JPY and contributes to the tone around the USD/JPY pair.

Meanwhile, JPY bulls don’t seem to be affected by Japan’s August trade data, which showed a big miss for both exports and imports. According to official data, Japan’s exports rose for a ninth straight month at a 5.6 percent annual rate in August, but at a much slower pace than expected. This was accompanied by a substantially lower-than-expected 2.3% rise in imports, although it did little to dent the underlying upbeat sentiment around the JPY. This, in turn, validates the short-term negative outlook for the USD/JPY pair and supports the prospects for an extension of the recently well-established downtrend.