USD/JPY recovers modest intraday losses, climbs back to YTD peak near 147.75-80 region

• USD/JPY attracts some dip-buying on Wednesday and stands tall near the YTD peak.
• The Fed-BoJ policy divergence, a bullish USD continue to act as a tailwind for the pair.
• Intervention fears could benefit the JPY and hold back bulls from placing aggressive bets.

The USD/JPY pair reverses an Asian session dip to the 147.35 area and climbs back close to its highest level since November 2022 touched the previous day. Spot prices currently trade around the 147.80 region, though lack bullish conviction amid fears of further jawboning by Japanese authorities.

In fact, Japan's top currency diplomat Masato Kanda was out with a verbal intervention earlier today and said that authorities won't rule out any options if speculative moves in the currency market persist. Apart from this, the cautious market mood, undermined by concerns about the worsening economic conditions in China, drives some haven flows towards the Japanese Yen (JPY) and exerts some downward pressure on the USD/JPY pair. The worries resurfaced after a private survey showed on Tuesday that business activity in China's services sector expanded at its slowest pace in eight months.

Furthermore, US Secretary of Commerce Gina Raimondo downplayed the possibility of any changes to the US tariffs imposed on China by the Trump administration until the ongoing review by the US Treasury is complete. This further tempers investors' appetite for riskier assets and benefits the JPY. That said, a more dovish stance adopted by the Bank of Japan (BoJ) keeps a lid on the JPY and limits the downside for the USD/JPY pair. In fact, the BoJ is the only central bank in the world to maintain negative interest rates and is expected to stick to its super-easy monetary policy stance.

Moreover, BoJ board member Toyoaki Nakamura indicated recently that it was premature to tighten monetary policy as recent increases in inflation were mostly driven by higher import costs rather than wage gains. This comes after BoJ Governor Kazuo Ueda said that the underlying inflation remains a bit below the 2% target, ensuring the status quo until next summer and marking a big divergence in comparison to the Federal Reserve's (Fed) hawkish outlook. In fact, the markets are still pricing in the possibility of one more 25 bps Fed rate hike move by the end of this year.

The view that the US central bank will keep rates higher for longer remains supportive of elevated US Treasury bond yields and allows the US Dollar (USD) to stand tall near a six-month peak touched on Tuesday. This, in turn, suggests that the path of least resistance for the USD/JPY pair is to the upside and any meaningful corrective decline might still be seen as a buying opportunity. Traders now look to the US economic docket, featuring the release of the ISM Services PMI, which will influence the USD and provide a fresh impetus to the pair later during the early North American session.

Technical levels to watch