Title: USD/JPY struggles near one-and-half-month low, defends 132.00 mark for now

August 01, 2022 03:50 AM ET

By: AnalysisWatch

The USD/JPY pair finds some support and recovers a few points from the 132.00 mark, the low of a month and a half, which was reached on Monday. For the fourth day in a row, the pair is trading just below the mid-132.00 level in early European trading.

The US dollar weakened near its lowest level since July 5, proving to be a key factor exerting some downward pressure on the USD/JPY pair. Friday's release of better U.S. Personal Consumption Expenditure (PCE) price index data was overshadowed by fears of an economic downturn. This continues to fuel speculation that the Fed will not raise interest rates as aggressively as previously thought and acts as a headwind for the greenback.

On the other hand, a combination of factors is expected to boost demand for the Japanese yen and also contribute to the decline in the USD/JPY pair. Prospects for a less aggressive Fed tightening policy have led to the recent decline in U.S. Treasury bond yields, narrowing the interest rate differential between the U.S. and Japan. This, combined with a less risk-averse attitude, has resulted in an influx into the JPY, the traditional safe haven currency.

However, a large divergence in the monetary policy stance of the Bank of Japan (dovish) and other major central banks is likely to limit a significant rise in the JPY. This, in turn, could provide some support to the USD/JPY currency pair. Investors may also refrain from placing aggressive bets and prefer to wait on the sidelines ahead of the important US macro data to be released this week at the start of the new month.