Japanese Yen edges higher as BoJ-Fed divergence offsets weak domestic data

• The Japanese Yen attracts dip-buyers after an unimpressive domestic data-inspired downtick.
• The divergent BoJ-Fed expectations continue to act as a tailwind for the lower-yielding JPY.
• Sustained USD buying could lend support to the USD/JPY pair ahead of the FOMC Minutes release.

The Japanese Yen (JPY) reverses a modest Asian session downtick led by mixed domestic data and turns positive for the second straight day against a firmer US Dollar (USD) on Wednesday. A government report showed that Japan’s core Machinery Orders unexpectedly rose in June. This, however, was offset by a drop in Japan’s exports for the third straight month in July, which raised concerns about the outlook for the export-reliant economy. This comes on top of the uncertainty over the likely timing of the next interest rate hike by the Bank of Japan (BoJ) and prompted some intraday selling around the JPY.

The USD, on the other hand, attracts some follow-through buying for the third consecutive day amid diminishing odds for a more aggressive policy easing by the Federal Reserve (Fed). This turns out to be another factor that offers some support to the USD/JPY pair. Traders, however, are still pricing a greater chance that the US central bank will resume its rate-cutting cycle in September. In contrast, the BoJ is expected to stick to its policy normalization path and hike the interest rate by the year-end. This, in turn,  might cap the USD and help limit deeper losses for the lower-yielding JPY ahead of the FOMC Minutes.

Japanese Yen edges higher as traders look past unimpressive data amid relatively hawkish BoJ

• A report published by the Cabinet Office earlier this Wednesday showed that Japan's core Machinery Orders rose for the first time in three months, by 3% in June, defying market expectations for a 1% drop. The rise was led by the 8.8% surge in non-manufacturing orders, which masked weakness in the manufacturing sector, where orders fell 8.1%.
• Separately, data from the Ministry of Finance showed Japan’s exports dropped for the third straight month, by 2.6% from a year earlier in July amid fears over the impact of higher US tariffs. The contraction was sharper than consensus estimates of a 2.1% and marked the steepest decline in over four years, fueling concerns about the economic outlook.
• Further details revealed that imports decreased 7.5% YoY in July, versus a 10.4% drop expected. As a result, the Trade Balance stood at a deficit of ¥117.5 billion, compared with the forecast of a surplus of ¥196.2 billion. This, in turn, prompts fresh selling around the Japanese Yen (JPY), though the Bank of Japan's hawkish outlook helps limit further losses.
• In fact, the BoJ revised its inflation forecast at the end of the July meeting and reiterated that it will raise interest rates further if growth and inflation continue to advance in line with its estimates. This marks a significant divergence in comparison to bets that the US Federal Reserve (Fed) will resume its rate-cutting cycle at the September policy meeting.
• Moreover, traders are pricing in the possibility that the US central bank will lower borrowing costs by 25 basis points twice by the end of this year. This, in turn, might hold back traders from placing aggressive bullish bets around the US Dollar and lend support to the lower-yielding JPY, backing the case for a further depreciating move for the USD/JPY pair.
• Investors, however, trimmed their expectations for a jumbo interest rate cut by the Fed in September following last Thursday's release of a hotter US Producer Price Index, which rose in July at the fastest monthly pace since 2022. The data indicated a gain of momentum in price pressures and should allow the Fed to stick to its wait-and-see approach.
• Hence, market participants will closely scrutinize the July FOMC Minutes, due for release later during the US session, for cues about the Fed's rate-cut path. Apart from this, Fed Chair Jerome Powell's speech at the Jackson Hole Symposium will influence the near-term USD price dynamics and provide some meaningful impetus to the USD/JPY pair.

USD/JPY could attract some buyers near 147.10-147.00 support

From a technical perspective, Tuesday's failure to find acceptance above the 148.00 mark and the subsequent slide seem to favor the USD/JPY bears. However, neutral oscillators on the daily chart warrant some caution. Moreover, spot prices have been oscillating in a range over the past two weeks or so. This further makes it prudent to wait for strong follow-through selling before positioning for any further depreciating move.

In the meantime, the 147.10-147.00 area could act as an immediate support, below which the USD/JPY pair could accelerate the slide towards retesting the multi-week low, around the 146.20 zone, touched last Thursday. Some follow-through selling below the 146.00 mark should pave the way for some meaningful downside in the near term.

On the flip side, bulls might wait for sustained strength and acceptance above the 148.00 mark. The USD/JPY pair might then climb to the next relevant hurdle near the 148.55-148.60 region, or the 50% retracement level of the downfall from the monthly high, before aiming to reclaim the 149.00 round-figure mark.