USD/JPY drifts lower for the fourth straight day and drops to a fresh low since early October.
Dovish Fed expectations continue to drag the US bond yields lower and undermine the USD.
A positive risk tone could help limit any further losses ahead of the FOMC meeting minutes.

The USD/JPY pair remains under some selling pressure for the fourth straight day on Tuesday – also marking the fifth day of a negative move in the previous six – and drops to its lowest level since October 4 during the Asian session. Spot prices, however, rebound a few pips in the last hour and currently trade around the 148.00 mark, though remain vulnerable to prolong the recent retracement slide from the 152.00 neighbourhood, or the YTD peak touched in October.

The US Dollar (USD) plummets to a near three-month low in the wake of dovish Federal Reserve (Fed) expectations and turns out to be a key factor dragging the USD/JPY pair lower. Investors now seem convinced that the US central bank is done with its policy-tightening campaign and are now pricing in the possibility of a 25 bps rate cut as soon as March 2024. This, in turn, drags the yield on the benchmark 10-year US government bond to a two-month low and continues to undermine the Greenback.

The Japanese Yen (JPY), meanwhile, has been able to capitalize on the declining US-Japan rate differential and speculations that the Bank of Japan (BoJ) will almost certainly end its negative interest rate policy by early next year. This further contributes to the offered tone surrounding the USD/JPY pair, though the risk-on mood could dent the JPY’s safe-haven status and lend some support. Traders might also prefer to wait on the sidelines ahead of the FOMC minutes, due later during the US session.

Investors, meanwhile, remain uncertain over the timing when the Fed will begin cutting rates. Moreover, Fed officials have not ruled out the possibility that more rate hikes could be needed should a change in economic data require it. In fact, Richmond Fed President Thomas Barkin said on Monday that inflation is likely to remain stubborn and force the central bank to keep interest rates higher for longer than investors currently anticipate. This could help limit the downside for the USD/JPY pair.

Hence, the minutes will be closely scrutinized for a fresh insight into the path of interest rates and policymakers’ views on whether the US central bank should raise interest rates again this year. This, in turn, should provide some meaningful impetus to the USD and the USD/JPY pair. Nevertheless, the aforementioned fundamental backdrop favours bearish traders and suggests that the path of least resistance for the USD/JPY pair is to the downside.


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