USD/JPY moves further away from 24-year high, slides to mid-134.00s amid weaker USD

• USD/JPY corrected sharply from a 24-year high touched earlier this Wednesday.
• Speculations for an intervention by Japanese authorities benefitted the JPY.
• Retreating US bond yields weighed on the USD and contributed to the selling bias.
• The Fed-BoJ policy divergence should limit losses ahead of the key FOMC decision.

The USD/JPY pair witnessed an intraday turnaround from a 24-year high touched earlier this Wednesday and continued losing ground through the early part of the European session. Spot prices dropped to a fresh daily low, around mid-134.00s in the last hour, reversing a major part of the previous day's positive move.

The Japanese yen drew support from speculations that authorities were uncomfortable about the recent speed of the yen's decline and would respond appropriately. Bearish traders further took cues from retreating US Treasury bond yields, which prompted aggressive long-unwinding around the US dollar. The combination of factors exerted downward pressure on the USD/JPY pair.

That said, the downside seems cushioned, at least for the time being, amid a big Japan-US interest rate differential, which is poised to widen further on more hawkish Fed expectations. Investors now seem convinced that the US central bank would tighten its monetary policy at a faster pace to combat stubbornly high inflation, which surged to a four-decade high in May.

In fact, Fed fund futures indicate rising odds of a 75 bps rate hike at the conclusion of a two-day FOMC meeting on Wednesday and another 75 bps hike in July. This had pushed the 2-year Treasury note - seen as a proxy for the Fed's policy rate - to its highest level since 2007 and the yield on the benchmark 10-year US government bond to levels not seen since April 2011.

In contrast, the BoJ has promised to conduct unlimited bond purchase operations to defend its near-zero target for 10-year yields. The Japanese central bank has also made it clear that it will stick to its ultra-loose policy settings until core inflation in Japan can stabilize near the 2% level. This, in turn, supports prospects for the emergence of some dip-buying around the USD/JPY pair.

Investors might also refrain from positioning for a deeper corrective pullback and prefer to wait on the sidelines ahead of the key central bank event risk. The Fed is scheduled to announce its decision later during the US session. A 75 bps Fed rate hike move would be the biggest since 1994 and enough to boost the buck, validating the positive outlook for the USD/JPY pair.

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