• USD/JPY regains some positive traction on Tuesday, albeit lacks follow-through.
• Intervention fears, a softer risk tone underpin the JPY and cap gains for the pair.
• The Fed-BoJ policy divergence should act as a tailwind ahead of the key US CPI.

The USD/JPY pair builds on the previous day's late rebound from sub-146.00 levels, or over a one-week low and gains some positive traction on Tuesday. Spot prices, however, struggle to capitalize on the momentum and retreat a few pips from the 147.00 neighbourhood, or the daily peak. The pair currently trades around the 146.65-146.70 region, up less than 0.10% for the day.

The immediate market reaction to Bank of Japan (BoJ) Governor Kazuo Ueda's hawkish comments fades rather quickly as market participants seem convinced that the Japanese central bank will maintain the status quo until next summer. In an interview with Yomiuri newspaper published on Saturday, Ueda said that ending negative interest rates is among the options available if the BoJ becomes confident that prices and wages will keep going up sustainably. That said, Japan’s ruling Liberal Democratic Party’s (LDP) Upper House secretary-general, Hiroshige Seko signalled his preference for an ultra-loose monetary policy. Seko added that the BoJ Gov Ueda had said that exit from the easy policy would be after achieving the 2% inflation target.

This eases market fears about an imminent shift in the BoJ's dovish policy stance, which, along with the emergence of some US Dollar (USD) buying, acts as a tailwind for the USD/JPY pair. The prospects for further policy tightening by the Federal Reserve (Fed) remain supportive of elevated US Treasury bond yields and revive the USD demand. The US central bank is expected to pause its rate-hiking cycle in September, though the markets are pricing in the possibility of one more 25 bps lift-off in 2023. The bets were reaffirmed by the upbeat US macro data released last week, which pointed to a resilient economy. Moreover, the fact that inflation is not cooling fast enough should allow the Fed to keep interest rates higher for longer.

Hence, the market focus will remain glued to the crucial US CPI report, due for release on Wednesday and will provide fresh cues about the Fed's future rate hike path. This, in turn, will play a key role in influencing the near-term USD price dynamics and determining the next leg of a directional move for the USD/JPY pair. In the meantime, the prevalent cautious market mood is seen lending some support to the safe-haven Japanese Yen (JPY). Apart from this, speculations that Japanese authorities might intervene to halt any further weakness in the domestic currency act as a headwind for the major. The aforementioned fundamental backdrop, however, suggests that the path of least resistance for spot prices is to the upside.

Technical levels to watch