• USD/JPY oscillates in a narrow trading band and is influenced by a combination of diverging forces.
• Bets for an imminent pause in the Fed’s rate-hiking cycle weigh on the USD and act as a headwind.
• The BoJ’s more dovish outlook caps gains for the JPY and limits any meaningful slide for the major.

The USD/JPY pair struggles for a firm intraday direction on Thursday and seesaws between tepid gains/minor losses through the first half of the European session. The pair is currently placed just above the 133.00 round-figure mark, nearly unchanged for the day, and is influenced by a combination of factors.

Growing worries about a deeper global economic downturn drive some haven flows towards the Japanese Yen (JPY), which, along with the prevalent US Dollar (USD) selling bias, act as a headwind for the USD/JPY pair. It is worth recalling that the International Monetary Fund (IMF) trimmed its 2023 global growth outlook on Tuesday, citing the impact of higher interest rates. Furthermore, the mixed Chinese trade data released earlier today adds to worries that the post-COVID recovery in the world's second-largest economy is losing steam.

Furthermore, growing acceptance that the Federal Reserve (Fed) is nearly done with its rate-hiking cycle leads to a further decline in the US Treasury bond yields. The resultant narrowing of the US-Japan rate differential is seen as another factor that benefits the JPY. Investors now seem convinced that the Fed will pause its monetary tightening after hiking one last time next month and the bets were reaffirmed by the softer US CPI report on Wednesday. This, in turn, drags the USD to its lowest level since early February and contributes to capping the USD/JPY pair.

That said, the Bank of Japan's (BoJ) dovish near-term outlook keeps a lid on any meaningful gains for the JPY and acts as a tailwind for the USD/JPY pair. This, in turn, might hold back bearish traders from placing aggressive bets and warrants some caution before confirming that the one-week-old uptrend has run its course. Market participants now look forward to the US economic docket, featuring the release of the Producer Price Index (PPI) and the usual Initial Weekly Jobless Claims, for short-term trading opportunities later during the early North American session.

Technical levels to watch