• USD/JPY pulls back from a two-week high and is pressured by a combination of factors.
• A modest pickup in demand for the JPY weighs on the pair amid subdued USD demand.
• The downside seems cushioned ahead of the FOMC and BoJ policy meetings this week.

The USD/JPY edges lower on the first day of a new week and erodes a part of Friday's strong gains to the 142.00 neighbourhood, or a nearly two-week high. Spot prices remain on the defensive through the Asian session and currently trade just below mid-141.00s, down around 0.30% for the day.

The Japanese Yen (JPY) attracts some buyers in reaction to comments by Japan's top currency diplomat Masato Kanda, saying that the recent inflation and wage rises were overshooting expectations. Speaking to reporters this Monday, Kanda added that the data available so far supports prospects for an upgrade in the Bank of Japan's (BoJ) inflation forecasts. This revives hopes that the BoJ might tweak its Yield Curve Control (YCC) policy later this week, which, along with a softer risk tone, underpins the safe-haven JPY and act as a headwind for the USD/JPY pair.

Apart from this, a modest US Dollar (USD) downtick is seen as another factor weighing on the pair, though the downside seems limited ahead of this week's key central bank event risks. The Federal Reserve (Fed) is scheduled to announce the outcome of a two-day policy meeting on Wednesday and is expected to hike interest rates by 25 bps. Moreover, doubts that the Fed will commit to a more dovish policy stance assist the buck to preserve its recovery gains from the lowest level since April 2022 touched last week and should lend support to the USD/JPY pair.

The highly-anticipated FOMC decision will be followed by the latest BoJ monetary policy update on Friday, which will play a key role in determining the near-term trajectory for the major. In the meantime, traders on Monday will take cues from the release of the flash US PMI prints, due later during the early North American session. The data will provide fresh insight into the US economic health, which, in turn, should influence the USD. Apart from this, the broader risk sentiment might also contribute to producing short-term opportunities around the USD/JPY pair.

Technical levels to watch