Japanese Yen dives to nearly two-week low against a broadly recovering USD

• The Japanese Yen resumes its short-term downtrend amid receding safe-haven demand.
• The emergence of some USD buying provides an additional boost to the USD/JPY pair.
• The divergent BoJ-Fed policy expectations should limit JPY losses and cap spot prices.

The Japanese Yen (JPY) attracts fresh sellers during the Asian session on Tuesday as the optimism over the resumption of US-China trade talks undermines safe-haven assets. This, along with a modest US Dollar (USD) uptick, lifts the USD/JPY pair beyond the 145.00 psychological mark, to a nearly two-week top in the last hour. However, a combination of factors might hold back the JPY bears from placing aggressive directional bets and cap gains for the currency pair.

Against the backdrop of signs of broadening inflation in Japan, an upward revision of the Q1 GDP reaffirmed bets that the Bank of Japan (BoJ) will continue raising interest rates. This marks a big divergence in comparison to a relatively dovish Federal Reserve (Fed), which should cap the USD and benefit the lower-yielding JPY. Furthermore, persistent trade-related uncertainties and rising geopolitical tensions support prospects for the emergence of some dip-buying around the JPY.

Japanese Yen is undermined by US-China trade talks optimism

• Top US and Chinese officials will meet for a second day in London on Tuesday for negotiations aimed at resolving the ongoing trade dispute between the world's two largest economies. Investors remain hopeful of a breakthrough over export controls for goods, such as rare earths, which remains supportive of a positive risk tone and undermines the safe-haven Japanese Yen.
• Data released on Monday showed that Japan's economy contracted at a slower pace than initially estimated, by 0.2% annualized rate during the January-March quarter, sparking optimism about the outlook. This, in turn, reaffirms market bets that the Bank of Japan will continue normalizing rates amid sticky inflation and should help limit any meaningful downfall for the JPY.
• BoJ Governor Kazuo Ueda said on Tuesday that the central bank will raise interest rates if it has enough confidence that the underlying inflation nears 2% or moves around 2%. If the economy and prices come under strong downward pressure, the central bank has limited room to underpin growth with interest rate cuts, with short-term rate still at 0.5%, Ueda added further.
• A stronger-than-expected US Nonfarm Payrolls (NFP) report released on Friday dampened hopes for imminent interest rate cuts by the Federal Reserve this year. This assists the US Dollar to regain positive traction following the previous day's modest slide and pushes the USD/JPY pair back closer to the 145.00 psychological mark during the Asian session on Tuesday.
• Traders, however, are still pricing in a greater chance that the US central bank will lower borrowing costs in September. Furthermore, Trump intensified his pressure campaign and urged Fed Chair Jerome Powell to cut rates by a full percentage point. This, along with concerns about the US government's financial health, might cap further USD appreciation.
• According to Ukraine's air force, Russia launched a massive airstrike on Ukraine and fired nearly 500 drones and missiles, marking a further escalation of the conflict in the three-year-old war. This keeps geopolitical risks in play, which should hold back the JPY bears from placing aggressive bets and act as a headwind for the USD/JPY pair ahead of US inflation figures.

USD/JPY might now aim to reclaim the 146.00 round figure

From a technical perspective, the overnight bounce from sub-144.00 levels, or the 100-period Simple Moving Average (SMA) on the 4-hour chart, and the subsequent move up favors the USD/JPY bulls. Moreover, oscillators on the daily chart have just started gaining positive traction, suggesting that the path of least resistance for spot prices is to the upside. Hence, some follow-through strength towards the 145.60-145.65 intermediate hurdle, en route to the 146.00 round figure, looks like a distinct possibility. The momentum could extend further towards the 146.25-146.30 region, or May 29 swing high.

On the flip side, the 145.00 mark now seems to protect the immediate downside ahead of the 144.60-144.55 region. This is closely followed by the 144.25 area (200-period SMA on the 4-hour chart), below which the USD/JPY pair could retest sub-144.00 levels. The latter should act as a key pivotal point, which if broken decisively would negate the positive outlook and shift the near-term bias in favor of bearish traders.