AUD/JPY holds gains near 97.50, upside seems limited due to differing policy outlook

• AUD/JPY could face struggles amid differing policy stances between central banks.
• The AUD struggles amid rising odds of the RBA starting to cut interest rates in February.
• BoJ reiterated its intention to continue raising rates if the economic outlook outlined in the January meeting materializes as anticipated.

AUD/JPY edges higher after registering more than 1% losses in the previous session, trading around 97.30 during the Asian hours on Tuesday. The upside of the AUD/JPY cross could be restrained amid increased likelihood of the Reserve Bank of Australia (RBA) starting cutting interest rates as soon as next month.

This dovish sentiment surrounding the RBA’s policy outlook is fueled by weaker core inflation data, which has fallen to its lowest level since Q4 2021, nearing the central bank's target range of 2% to 3%. All eyes are now on Australia's upcoming quarterly inflation report, set for release on Wednesday, as it could offer additional clues about the future direction of interest rates.

The Australian Dollar also failed to gain support from China’s recent stimulus measures to promote its development of index investment products, its latest effort to revive the ailing equity market. The China Securities Regulatory Commission (CSRC) has approved a second round of long-term stock investment pilot programs valued at 52 billion Yuan ($7.25 billion). As close trade partners, China's economic performance significantly impacts the Australian economy.

The AUD/JPY cross could lose value as the Japanese Yen (JPY) strengthens, following increasing expectations that the Bank of Japan (BoJ) will continue raising interest rates. Last week, the BoJ reaffirmed its commitment to further rate hikes and adjustments to its monetary policy stance if the outlook presented at the January meeting unfolds as expected.

The BoJ also announced a JPY 200 billion purchase of commercial paper and confirmed it would provide US Dollar (USD) funding against pooled collateral. Meanwhile, Japan’s Economy Minister, Ryosei Akazawa, commented on Tuesday that he would “closely monitor the impact of the rate hike on the economy.”