USD/JPY Price Analysis: USD trades soft ahead of Fed decision

• USD/JPY tallies a third consecutive day of losses towards the 140.40 area.
• US Treasury yields are falling ahead of the Fed decision.
• JPY strength suggests that markets are concerned with a possible surprise by the BoJ on Friday.

On Wednesday, the JPY gained ground agains most of its rivals, and the USD/JPY pair declined towards 140.40. The USD trades soft ahead of the Federal Reserve (Fed) decision later in the session, while the Yen strengthened on the back of a possible surprise of the Bank of Japan (BoJ) on Friday.

Ahead of the Federal Reserve (Fed) decision later in the session, the USD is falling, and US Treasury yields are backing down. Markets have already priced in a 25 basis point (bps) hike and are betting on 20% odds of a similar hike in September and then on 45% probabilities in November. As there won’t be any updated macro forecast or dot plot, messaging regarding forward guidance will be key for investors modelling their expectations for the next meetings.

On the other hand, markets have been receiving mixed signals regarding the next BoJ decision in the last sessions. Masato Kanda, a top currency Japanese diplomat, suggested that a Yield Control Curve (YCC) is highly possible. At the same time, BoJ’s Governor Kazuo Ueda was quoted as saying that the bank will maintain its accommodative approach. While the BoJ has a history of surprising markets, the broad consensus is that it will hold its policy unchanged, but markets seem to be pricing in a possibility of a pivot.

USD/JPY Levels to watch

The USD/JPY technical outlook, according to the daily chart suggests a neutral to bullish outlook for the short term. On the one hand, indicators give mixed signals, with the Relative Strength Index (RSI) falling below it midline while the Moving Average Convergence Divergence (MACD) prints fading red bars. On the other, the pair trades above the 100 and 200-day Simple Moving Average (SMA), which suggests that the buyers are overall in command, but the Fed’s decision will dictate the short-term trajectory.

Support levels: 140.00,139.10,138.70.
Resistance levels: 141.58 (20-day SMA), 142.00, 143.00.

USD/JPY Daily chart