USD/JPY consolidates around mid-138.00s, just below YTD top ahead of FOMC minutes

• USD/JPY oscillates in a narrow trading band just below the YTD peak touched on Tuesday.
• A modest USD pullback from a two-month high and a softer risk tone cap gains for the pair.
• The Fed-BoJ policy divergence continues to act as a tailwind ahead of the FOMC minutes.

The USD/JPY pair extends its sideways consolidative price move for the second straight day and remains confined in a narrow band through the early North American session on Wednesday. The pair is currently placed just below mid-138.00s and remains well within the striking distance of the YTD peak touched the previous day.

The US Dollar (USD) pulls back following an early uptick to a fresh two-month high amid a further decline in the US Treasury bond yields. Apart from this, a generally weaker tone around the equity markets drives some haven flow towards the Japanese Yen (JPY) and acts as a headwind for the USD/JPY pair. Against the backdrop of worries about a global economic slowdown, the lack of progress in talks over increasing the US debt ceiling tempers investors' appetite for riskier assets and benefits traditional safe-haven assets.

The downside for the USD, meanwhile, seems cushioned amid firming expectations that the US central bank will keep interest rates higher for longer, bolstered by the recent hawkish comments by a slew of Federal Reserve (Fed) officials. In fact, the markets have been pricing in the possibility of another 25 bps lift-off in June. This marks a big divergence in comparison to a more dovish stance adopted by the Bank of Japan (BoJ), which continues to undermine the JPY and is seen lending some support to the USD/JPY pair.

Traders also seem reluctant to place aggressive bets and prefer to wait on the sidelines ahead of the release of the FOMC meeting minutes, due later during the US session. The minutes will be closely scrutinized for clues about the Fed's future rate-hike path, which will play a key role in influencing the USD price dynamics and provide a fresh directional impetus to the USD/JPY pair. Nevertheless, the aforementioned fundamental backdrop favours bulls and suggests that the path of least resistance for spot prices is to the upside.

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