USD/JPY recovers some pips after refreshing YTD low, remains strongly offered below 141.00

• USD/JPY remains under some selling pressure on Friday and hits a new YTD low.
• Divergent Fed-BoJ policy expectations continue to weigh heavily on the pair.
• Investors are looking to next week’s Fed and BoJ meetings for fresh directional impetus.

USD/JPY drops to a YTD low in the first half of the European session on Friday, although it manages to recover a few pips in the last hour. Spot prices are currently trading around the 140.75 region, still down over 0.75% on the day and looking vulnerable to further declines.

Divergent policy expectations from the Federal Reserve (Fed) and the Bank of Japan (BoJ) led to the recent narrowing of the US-Japan exchange rate differential and continued to deconsolidate Japanese yen (JPY) trading. In fact, markets have started to price in the possibility of more interest rate cuts by the US central bank, following the release of a weaker-than-expected US producer price index (PPI) that indicated inflation is easing .

Meanwhile, Dovish Fed expectations drag the benchmark US 10-year government bond yield to its lowest level since May 2023. Meanwhile, Japan’s 10-year government bond yield also fell to a four-week low , though the unwavering signals from BoJ policymakers. should limit the fall. BoJ board member Junko Nakagawa said this week that the central bank will raise interest rates further if the economy and inflation move in line with its forecasts.

In addition, BoJ board member Naoki Tamura said on Thursday that the central bank needs to raise short-term rates to at least around 1% by fiscal year 2026 to stably reach the 2% inflation target. This, in turn, reaffirms bets that the Japanese central bank will announce another interest rate hike by the end of this year, which could continue to drive flows into the JPY and support prospects for a further bearish move in the USD/JPY pair .

That said, the upbeat market mood could keep a lid on any further JPY gains as traders look ahead to key risks from next week’s central bank events before placing new directional bets. The Fed is scheduled to announce its decision at the end of a two-day policy meeting on Wednesday. This will be followed by the BoJ’s policy update on Friday, which will play a key role in influencing the USD/JPY pair in the near term. However, spot prices remain on track for a second straight week of losses – marking the third in the last four.