November 02,2022 05:46 AM ET
By:AnalysisWatch
USD/JPY is under renewed selling pressure on Wednesday and is back near the overnight low around the 147.00 mark in the first half of the European session.
Rumors that the Federal Reserve will take a less hawkish stance on signs of a slowdown in the U.S. economy keep dollar bulls on the defensive. The Japanese yen, meanwhile, is supported by expectations that the government may intervene again to soften any further sharp falls in the domestic currency. The combination of factors puts some downward pressure on USD/JPY, although a significant correction still seems unlikely.
Traders may refrain from making aggressive bets and prefer to stay on the sidelines ahead of the expected FOMC policy decision, which will be announced later in the US session. The Fed is expected to raise interest rates again by 75 basis points for the fourth time in as many meetings. However, the focus will be on the monetary policy statement and Fed Chairman Jerome Powell's comments at the post-meeting press conference.
Investors will be looking for clues on the pace of future rate hikes, which will influence near-term dollar price dynamics and determine the near-term trajectory of the USD/JPY pair. However, current market prices continue to indicate a greater than 50% probability that the Fed will raise interest rates in December by 50 basis points. In contrast, the Bank of Japan has shown no inclination to raise interest rates and has reiterated that it will continue to guide the 10-year bond yield at 0%.
This marks a large divergence between the two central banks and a further widening of the US-Japan rate differential, which should limit deeper losses in the USD/JPY pair. Even from a technical point of view, spot prices have so far managed to defend the 200-period SMA on the 4-hour chart. This makes it prudent to wait for strong follow-through selling before positioning for an extension of the recent pullback from the highest level since August 1990.
Looking ahead to the key central bank event, traders may look to the release of the US ADP report on private sector employment. However, the data may be of little significance for the USD/JPY pair.