• USD/JP kicks off the new week on a positive note, reversing a part of Friday’s retracement slide.
• The divergent Fed-BoJ policy stance continues to act as a tailwind for spot prices and favors bulls.
• Fed hike bets and oil-driven inflation fears support elevated US bond yields, supporting the USD.

The USD/JPY pair attracts some dip-buyers at the start of a new week and climbs to the 157.75 area during the Asian session, reversing a part of Friday's retracement slide from the vicinity of a multi-week top. Spot prices stick to gains following the release of Bank of Japan (BoJ) Minutes and remain at the mercy of US Dollar (USD) price dynamics.

Against the backdrop of the US Federal Reserve's (Fed) hawkish outlook, energy-driven inflation fears underpin prospects for further policy tightening and keep US bond yields elevated near multi-year highs. Apart from this, geopolitical risks stemming from the US-Iran standoff help the safe-haven USD regain positive traction and remain close to its highest level since July 29, touched last Thursday. This, in turn, is seen as a key factor acting as a tailwind for the USD/JPY pair.

Meanwhile, the Japanese Yen (JPY) reacted little to the July BoJ meeting Minutes, which showed that members agreed financial conditions are accommodative and that firms are steadily passing on rising raw material costs, keeping inflation elevated. Even speculations that authorities will step in again to prop up the domestic currency fail to impress JPY bulls, suggesting that the path of least resistance for the USD/JPY pair is to the upside amid the BoJ's dovish-leaning tone.

Traders, however, might refrain from placing aggressive directional bets and opt to wait for further developments surrounding the Middle East crisis. Nevertheless, the fundamental backdrop seems tilted in favor of USD bulls and backs the case for an extension of the USD/JPY pair's recent well-established multi-week uptrend. Traders now look to speeches from influential FOMC members for short-term opportunities later during the North American session.

USD/JPY 4-hour chart

Technical Analysis

The USD/JPY pair reclaims the 23.6% Fibonacci retracement level after showing resilience below the 50-period Simple Moving Average (SMA) on the 4-hour chart. This points to the underlying demand and reinforces a constructive tone above the 50-SMA. The next notable resistance aligns with the cycle high anchor near 159.08, where a sustained break would open further upside.

On the downside, initial support is seen at the 23.6% Fibo. retracement at 157.62, followed by the 50-period SMA at 157.17, with deeper structural cushions at the 38.2% retracement at 156.71 and the 50.0% retracement at 155.98.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Bank of Japan FAQs

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.