USD/JPY flirts with YTD peak, remains below 145.00 mark amid fears of an intervention

• USD/JPY touches a fresh multi-week high on Friday, albeit lacks follow-through buying.
• The BoJ-Fed policy divergence continues to act as a tailwind and remains supportive.
• A softer USD caps the upside amid the risk of intervention by Japanese authorities.

The USD/JPY pair adds to its weekly gains and steadily climbs to the 145.00 psychological mark during the Asian session, back closer to the YTD peak touched in June. The uptick, however, lacks bullish conviction as traders remain on guard in the wake of expectations for jawboning/intervention by Japanese authorities.

The Japanese Yen (JPY) continues with its relative underperformance on the back of a more dovish stance adopted by the Bank of Japan (BoJ), which is the only central bank in the world to maintain a negative benchmark interest rate. Even the recent step taken in July to make the Yield Curve Control (YCC) policy more flexible and allow yield on the 10-year Japanese government bond to move up toward 1% has failed to lend support to the domestic currency. In fact, policymakers have stressed that the policy adjustment was a technical tweak aimed at extending the shelf life of stimulus.

Moreover, weaker Japanese wage data released this week reaffirmed market bets that the BoJ will maintain ultra-low interest rates for the rest of the year. This marks a big divergence in comparison to expectations for a relatively more hawkish Federal Reserve (Fed) and acts as a tailwind for the USD/JPY pair. In fact, the markets are still pricing in the possibility of one more 25 bps Fed rate hike in 2023, despite the softer-than-expected US consumer inflation figures released on Thursday. In fact, the headline US CPI rose from 3% to 3.2% YoY rate in July, less than consensus estimates.

Adding to this, the Core CPI inflation, which excludes volatile food and energy prices, edged lower to 4.7% from 4.8% in June and indicated that some measures of underlying price pressures cooled significantly last month. The inflation, however, is still way above the Fed's 2% target and supports prospects for further policy tightening. This remains supportive of a further rise in the US Treasury bond yields, resulting in the widening of the US-Japan rate differential and favouring the USD/JPY bulls. That said, a modest US Dollar (USD) downtick acts as a headwind for the major.

Nevertheless, spot prices remain on track to register strong weekly gains and the aforementioned fundamental backdrop suggests that the path of least resistance is to the upside. Hence, any corrective pullback might still be seen as a buying opportunity and is more likely to remain limited. Market participants now look to the US economic docket, featuring the release of the Producer Price Index (PPI), along with the Preliminary Michigan Consumer Sentiment and Inflation Expectations. The data might influence the USD and provide some impetus to the USD/JPY pair.

Technical levels to watch