USD/JPY eases from weekly high, holds steady below 137.00 mark as Fed rate hike looms

• USD/JPY edges higher for the third straight day on Wednesday and climbs to a fresh weekly high.
• The emergence of fresh USD selling holds back bulls from placing fresh bets and caps the upside.
• Investors now await the outcome of a two-day FOMC meeting before placing fresh directional bets.

The USD/JPY pair has managed to hold on to its mild positive bias through the early part of the European session. Spot prices were last seen hovering around the 137.00 mark, just a few pips below the weekly high touched earlier this Wednesday.

A goodish recovery in the global risk sentiment - as depicted by a strong intraday rally in the equity markets - is undermining the safe-haven Japanese yen and acting as a tailwind for the USD/JPY pair. The risk-on flow, meanwhile, is allowing the US Treasury bond yields to capitalize on the overnight bounce from their lowest levels since late May. This further widens the US-Japan rate differential, which is seen as another factor weighing on the JPY and extending some support to spot prices.

The US dollar, however, is seen struggling to gain any meaningful traction amid some nervousness ahead of the highly anticipated FOMC monetary policy decision. This, in turn, is holding back traders from placing aggressive bullish bets around the USD/JPY pair and capping the upside. Hence, the market focus remains on the outcome of a two-day FOMC monetary policy meeting, which would play a key role in influencing the USD and provide a fresh directional impetus to the major.

The Fed is scheduled to announce its policy decision later during the US session and is widely expected to raise interest rates by another 75 bps to tame red-hot inflation. Market participants, however, seem divided over the need for more aggressive rate hikes amid growing recession fears, suggesting that the focus will be on Fed Chair Jerome Powell's post-meeting press conference.

Investors will look for clues about the Fed's near-term policy outlook, which, in turn, could drive near-term USD demand. Nevertheless, a big divergence in the monetary policy stance adopted by the Bank of Japan and other major central banks could continue undermining the JPY. This suggests that the path of least resistance for the USD/JPY pair is to the upside.

Technical levels to watch