USD/JPY consolidates near multi-week peak, bullish potential seems intact

• USD/JPY oscillates in a narrow trading band, though the downside remains cushioned.
• Bets for more rate hikes by Fed underpin the USD and act as a tailwind for the major.
• The BoJ's dovish stance weighs on the JPY and supports prospects for additional gains.

The USD/JPY pair struggles to capitalize on the overnight goodish rebound from the 142.25-142.20 area and oscillates in a narrow band through the Asian session on Thursday. Spot prices currently trade around the 143.30-143.25 zone and remain well within the striking distance of a multi-week peak touched on Tuesday.

Despite the Fitch downgrade of the US credit rating, the US Dollar (USD) stands tall near its highest level since July 7 and continues to draw support from expectations that the resilient US economy should allow the Federal Reserve (Fed) to keep rates higher for longer. The bets were reaffirmed by the US ADP report released on Wednesday, which showed that private-sector employers added 324K jobs in July, much higher than the 189K expected. This remains supportive of elevated US Treasury bond yields, which is seen underpinning the Greenback and should act as a tailwind for the USD/JPY pair.

The Japanese Yen (JPY), on the other hand, is weighed down by the Bank of Japan's (BoJ) dovish stance. In fact, BoJ Governor Kazuo Ueda reiterates last week that the central bank won't hesitate to ease policy further and that more time was needed to sustainably achieve the 2% inflation target. Moreover, the minutes from the BoJ policy meeting showed that members agreed to maintain the current easy monetary policy. Furthermore, BoJ Deputy Governor Shinichi Uchida turned down talks of an early end to the negative rate policy. This, along with a slight recovery in the risk sentiment, undermines the safe-haven JPY.

The aforementioned fundamental backdrop seems tilted firmly in favour of bulls and suggests that the path of least resistance for the USD/JPY pair is to the upside. That said, the lack of any meaningful buying warrants some caution before positioning for an extension of the recent strong rally from the 138.00 neighbourhood witnessed over the past week or so. Market participants now look to the US economic docket, featuring the release of the usual Weekly Initial Jobless Claims, the ISM Services PMI and Factory Orders. The focus, however, will remain on the closely-watched US monthly jobs data, or the NFP report on Friday.

Technical levels to watch