USD/JPY sticks to gains near one-week high, just above 144.00 ahead of Fed decision

• USD/JPY gains some positive traction for the third straight day amid broad-based USD strength.
• The Fed-BoJ policy divergence, a positive risk tone undermines the JPY and remains supportive.
• Investors now eye the FOMC decision for a fresh impetus ahead of the BoJ meeting on Thursday.

The USD/JPY pair reverses an intraday dip to the 143.35 area and moves back into positive territory for the third straight day on Wednesday. The uptick lifts spot prices to a one-week high, around the 144.20 region during the mid-European session, and is sponsored by strong follow-through US dollar buying.

In fact, the USD Index, which measures the greenback's performance against a basket of currencies, hits a fresh 20-year high and remains well supported by hawkish Fed expectations. The stronger US CPI report for August all but confirmed that the US central bank will continue to tighten its monetary policy at a faster pace. The markets have fully priced in at least a 75 bps rate hike at the end of a two-day policy meeting on Wednesday.

In contrast, the Bank of Japan has been lagging in the process of policy normalisation and is committed to continuing with its monetary easing. This marks a big divergence in comparison to a more hawkish stance adopted by other major central banks, which, along with a generally positive tone around the equity markets, is weighing on the safe-haven Japanese yen. The combination of supporting factors continues to act as a tailwind for the USD/JPY pair higher.

The upside, however, remains capped as investors seem reluctant to place aggressive bets ahead of the key central bank event risks. The Fed will announce its policy decision later during the US session. This will be accompanied by the updated economic projections and the so-called dot plot. Apart from this, Fed Chair Jerome Powell's comments at the post-meeting press conference will be scrutinized for clues about the future rate-hike path.

This, in turn, will play a key role in influencing the near-term USD price dynamics and provide some meaningful impetus to the USD/JPY pair ahead of the BoJ meeting on Thursday. In the meantime, the risk of a further escalation in the Russia-Ukraine conflict and growing worries about a deeper global economic downturn seem to lend some support to the JPY. This, in turn, could keep a lid on any further gains for the USD/JPY pair, at least for now.

Technical levels to watch