USD/JPY faces barricades above 138.50 as BOJ looks to unwind ultra-loose policy

• USD/JPY is facing selling pressure above 138.50 as the risk-off impulse has lost its traction.
• Market participants are divided on decisions over deceleration in an interest rate hike by the Fed.
• A Reuters poll claims that the BOJ could consider unwinding monetary easing in the second half of 2023.

The USD/JPY pair has witnessed a rebound after dropping below 138.50 in the Asian session. The rebound seems to lack confidence and is expected to witness fresh selling pressure after dropping below the same. Meanwhile, the risk-off impulse has lost its glory as China has announced stimulus to offset bleak economic projections amid escalating Covid-19 infections.

The risk-appetite theme has recovered sharply and is impacting the US Dollar Index (DXY). The USD Index has refreshed its intraday low near 106.25 and is expected to extend its losses further. Meanwhile, the 10-year US Treasury yields have extended their gains above 3.71% ahead of the speech from Federal Reserve (Fed) chair Jerome Powell.

Market participants are divided on the decision over deceleration in the interest rate hike by the Fed. A decline in inflation in October month and rising financial risks in the United States economy have resulted in expectations for a slowdown in the rate hike pace.  

Apart from that Fed’s Beige Book will also remain in focus. The Fed’s Beige Book will provide projections for growth rate and inflation, the current situation of consumer spending, and other economic catalysts. Also, the US Automatic Data Processing (ADP) Employment data will be keenly watched. The US economy is expected to display a decline in employment generation amid rising interest rates.

On the Tokyo front, the Bank of Japan (BOJ) is expected to consider unwinding the prolonged monetary easing, according to an economists’ poll by Reuters.  More than 90% of economists have supported the view of phasing out monetary easing in the latter half of CY2023. This might strengthen the Japanese yen bulls further as BOJ’s ultra-loose policy has been a major factor behind the yen’s weakness.