USD/JPY retreats from one-week high, downside seems limited ahead of FOMC decision

• USD/JPY struggles to capitalize on its modest intraday uptick on Wednesday to a one-week high.
• The anti-risk flow benefits the JPY and caps the upside amid a modest fall in the US bond yields.
• Strong follow-through USD buying offers some support ahead of the key FOMC policy decision.

The USD/JPY pair struggles to find acceptance above the 144.00 mark and retreats from a one-week high touched this Wednesday. The pair slides back below mid-143.00s during the early European session and is pressured by reviving demand for the safe-haven Japanese yen, though lacks follow-through selling.

The market sentiment remains fragile amid concerns that rapidly rising interest rates will lead to a deeper global economic downturn. Apart from this, headwinds stemming from China's zero-covid policy and the protracted Russia-Ukraine war have been fueling recession fears. This, in turn, tempers investors' appetite for riskier assets and is driving haven flows towards the JPY.

The anti-risk flow is reinforced by a modest pullback in the US Treasury bond yields, which is seen as another factor exerting some downward pressure on the USD/JPY pair. That said, a strong pickup in the US dollar demand, bolstered by hawkish Fed expectations, should continue to lend support to spot prices and help limit deeper losses ahead of the key central bank event risks.

The Federal Reserve is scheduled to announce its decision at the end of a two-day policy meeting on Wednesday and is widely expected to deliver another supersized 75 bps rate increase. The markets also seem convinced that the US central bank will stick to its aggressive rate=hiking cycle to tame inflation, which should act as a tailwind for the US bond yields and the greenback.

Hence, the focus will remain glued to the updated economic projections, the so-called dot plot and Fed Chair Jerome Powell's comments at the post-meeting press conference. Investors will look for fresh clues about the future rate hike path. This, in turn, will play a key role in influencing the USD price dynamics and help determine the near-term trajectory for the USD/JPY pair.

This will be followed by the Bank of Japan meeting on Thursday. The Japanese central bank remains committed to maintaining ultra-low interest rates and dovish policy guidance. This marks a big divergence from a more hawkish stance adopted by other major central banks, which supports prospects for an extension of the USD/JPY pair's recent strong appreciating move.

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