Title: USD/JPY edges higher amid a pickup in USD demand, lacks follow-through buying

September 16, 2022 02:59 AM ET

By: AnalysisWatch

The USD/JPY pair is attracting some bearish buying near the 142.80 area on Friday and is steadily climbing towards a new daily high at the start of the European session. The pair is currently trading around the 142.65-142.70 area and is benefiting from a recovery in demand for the US dollar.

Tuesday's U.S. Consumer Price Index (CPI) report reignited bets on more aggressive Fed policy tightening, which continues to support the greenback and act as a tailwind for the USD/JPY pair. In fact, markets have begun to consider the possibility of a 100 basis point rate hike at the next FOMC meeting on September 20-21 and another 75 basis point hike in November.

The Bank of Japan, on the other hand, has lagged behind other major central banks in the policy normalization process and remains committed to further monetary easing. The resulting policy divergence between the Fed and the BoJ is seen as weighing on the Japanese and is proving to be another factor providing some support to the USD/JPY pair. However, the rally lacks conviction.

The prospect of rapid interest rate hikes, along with headwinds from new COVID-19 restrictions in China and the prolonged war between Russia and Ukraine, have fueled recession fears. This in turn is tempering investor appetite for riskier assets, as evidenced by the further decline in equity markets. The anti-risk flow is benefiting the safe-haven yen and limiting gains in the USD/JPY.

Traders also seem reluctant and prefer to steer clear ahead of the risks associated with next week's central bank events. The Fed is set to announce its policy decision on Wednesday, which will be followed by the Bank of Japan meeting on Thursday. This will play a key role in the near-term price dynamics for the USD/JPY pair and help determine the next step in a directional move.

In the meantime, traders will take note of the preliminary Michigan Consumer Sentiment Index for the United States on Friday, which will be released later in the North American session. This index, along with the demand for the dollar, will be released later in the day.

Dollar demand will be driven by U.S. bond yields. Apart from that, the broader market risk sentiment should produce short-term trading opportunities around the USD/JPY pair on the last day of the week.