Japanese Yen edges higher vs bullish USD amid expectations of a more hawkish BoJ

The USD/JPY pair edges lower during the Asian session on Thursday, snapping a three-day winning streak and eroding a part of the previous day's gains to a nearly two-week high. Spot prices currently trade around the 156.00 mark as the focus now shifts to the highly anticipated Bank of Japan (BoJ) rate decision on Friday.

The Japanese central bank is universally expected to raise its benchmark interest rate by 25 basis points (bps) to a 31-year high of 1.25% at the end of the September policy meeting. Moreover, traders have been pricing in a greater chance of a follow-through up move in December amid inflation risks stemming from higher energy prices. This, in turn, is seen as offering some support to the Japanese Yen (JPY) and weighing on the USD/JPY pair.

Meanwhile, the US Dollar (USD) touches a fresh high since late July in the wake of the US Federal Reserve's (Fed) hawkish rate hike on Wednesday. In fact, the US central bank raised borrowing costs for the first rate hike in over three years, and the so-called dot plot indicated one more interest rate increase ​this year. Moreover, oil-driven inflation fears underpin prospects for further Fed tightening, supporting the USD and the USD/JPY pair.

Apart from this, escalating Middle East tensions further underpin the safe-haven buck. In the latest developments, Iran-backed Houthi rebels said that Saudi aircraft have carried out more than 450 air strikes across Yemen in the past week and claimed that they shot down a Saudi F-15 fighter jet over Marib province. This keeps geopolitical risks premium in play, favouring USD bulls and contributing to limiting the downside for the USD/JPY pair.

USD/JPY 4-hour chart

Technical Analysis

The USD/JPY pair retains a bearish near-term bias below the 156.60-156.65 confluence – comprising the 100-period Simple Moving Average (SMA) on the 4-hour chart and the 50.0% Fibonacci retracement. Further up, barriers are seen at the 61.8% level at 157.55 and the 78.6% retracement near 158.81 ahead of the swing high at 160.42.

The setup, however, suggests that rallies remain vulnerable while the broader corrective phase from the cycle top persists. On the downside, initial support emerges at the 38.2% retracement at 155.78, ahead of the 23.6% level at 154.68, while a deeper pullback would expose the structural floor around 152.91.