USD/JPY consolidates below 145.00, awaits fresh catalyst before the next leg up

• USD/JPY struggles to gain any meaningful traction and remains confined in a narrow band.
• The downside seems cushioned amid the Fed-BoJ policy divergence, modest USD strength.
• Investors now await the US NFP report on Friday before placing aggressive directional bets.

The USD/JPY pair struggles to capitalize on the previous day's bounce from the 143.50 area, or over a one-and-half-week low and oscillates in a narrow band on Thursday. The pair remains below the 145.00 psychological mark through the first half of the European session, though the bias still seems tilted in favour of bullish traders.

A big divergence in the policy stance adopted by the Bank of Japan and other major central banks might continue to undermine the Japanese yen. In fact, the Japanese central bank has been lagging behind other major central banks in the process of policy normalisation and remains committed to continuing with its monetary easing. This, along with the emergence of some US dollar dip-buying, supports prospects for some meaningful upside for the USD/JPY pair.

The recent hawkish remarks by several Fed officials reaffirmed expectations that the US central bank will tighten its monetary policy at a faster pace and continues to act as a tailwind for the USD. In fact, the markets have been pricing in the possibility of another supersized 75 bps Fed rate hike move in November. This remains supportive of elevated US Treasury bond yields, widening the US-Japan rate differential and adding credence to the constructive outlook.

Japan's finance minister Shunichi Suzuki, however, said on Monday that the government stands ready to intervene in currency markets to prevent deeper losses in the domestic currency. This is seen as a key factor holding back traders from placing aggressive bullish bets around the USD/JPY pair. Investors also seem reluctant and might wait for a fresh catalyst from the closely-watched US monthly employment details, popularly known as the NFP report on Friday.

In the meantime, the release of the US Weekly Initial Jobless Claims, speeches by FOMC officials and the US bond yields will drive the USD demand. Apart from this, traders will take cues from the broader market risk sentiment, which might influence the safe-haven JPY and produce short-term opportunities around the USD/JPY pair.

Technical levels to watch