The USD/JPY pair extends the previous day’s sharp retracement slide from the 137.75-137.80 region, or a nearly two-month high, and remains under heavy selling pressure for the second successive day on Wednesday. The downfall remains uninterrupted through the early European session and drags spot prices below the 136.00 mark or a fresh weekly low in the last hour.
Concerns that other regional US lenders face solvency issues fuel worries about a full-blown banking crisis and boost demand for traditional safe-haven assets, including the Japanese Yen (JPY). This, in turn, drags the USD/JPY pair lower amid the ongoing US Dollar (USD) retracement slide from a three-week top touched on Tuesday. The overnight release of the US Job Openings and Labor Turnover Survey (JOLTS) indicated that the ultra-tight US job market is loosening. Apart from this, concerns over the US debt ceiling and renewed fears of a full-blown banking crisis continue to weigh on the Greenback.
That said, a considerable divergence in the monetary policy stance adopted by the Bank of Japan (BoJ) and the Federal Reserve (Fed) could help limit the downside for the USD/JPY pair, at least for the time being. It is worth recalling that BoJ Governor Kazuo Ueda said last week that the risk from tightening too hastily is more significant than monetary policy falling behind the curve and added that it would be appropriate to continue monetary easing to achieve the 2% inflation target. In contrast, the US central bank is widely expected to hike interest rates by another 25 bps at the end of a two-day monetary policy meeting later this Wednesday.
Market participants, however, remain divided over the possibility that the Fed will announce a pause in its rate-hiking cycle as inflation is still trending well above the central bank’s target range. The risk of a banking crisis and worsening economic conditions might force the US central bank to soften its hawkish tone. The uncertainty, meanwhile, might hold back traders from placing aggressive bets around the USD/JPY pair ahead of the highly-anticipated FOMC decision, due to be announced later during the US session. This, in turn, warrants caution before positioning for any meaningful corrective fall.
Heading into the critical event risk, traders on Wednesday might take cues from the US economic docket, featuring the release of the ADP report on private-sector employment and the ISM Services PMI. The critical macro data might influence the USD price dynamics, which, along with the broader risk sentiment, should provide some impetus to the USD/JPY pair. That said, the immediate market reaction is more likely to remain limited.