USD/JPY remains on the defensive below mid-148.00s amid subdued USD price action

• USD/JPY edges lower on Wednesday and stalls the overnight recovery from a multi-month low.
• Firming expectations that the Fed is done raising rates undermines the USD and cap the upside.
• Speculations that the BoJ will end its negative rates policy in early 2024 also act as a headwind.

The USD/JPY pair struggles to capitalize on the previous day's solid 140-145 pips recovery from the 147.15 area, or its lowest level since September 14 and ticks lower during the Asian session on Wednesday. Spot prices, however, manage to hold above the 148.00 round figure and remain at the mercy of the US Dollar (USD) price dynamics.

The USD did get a minor lift on Tuesday and bounced off a near three-month low in reaction to hawkish FOMC minutes, which showed policymakers backing the case for keeping interest rates higher for longer to tame inflation. Investors, however, seem convinced that the US central bank will keep rates steady rather than hiking. Moreover, the current market pricing indicates the possibility of a first-rate cut at the April 30-May 1 FOMC policy meeting. This is reinforced by the fact that the yield on the benchmark 10-year US government bond remains depressed near a two-month low and acts as a headwind for the Greenback.

The Japanese Yen (JPY), on the other hand, draws support from narrowing US-Japan rate differential and speculations that the Bank of Japan (BoJ) will almost certainly end its negative rate policy in the first few months of 2024. The hawkish tilt follows the BoJ's decision last month to relax the cap on long-term rates by tweaking its Yield Curve Control (YCC) policy. Furthermore, BoJ Governor Kazuo Ueda last week said that Japan was making progress in sustainably hitting the 2% inflation target and that the central bank won't necessarily wait until real wages turn positive to exit the decade-long accommodative policy settings.

This, in turn, suggests that the overnight recovery might still be categorized as a short-covering rally, especially after the recent slump of nearly 500 pips from the 152.00 neighbourhood, or the YTD peak retested earlier this month. Moreover, the aforementioned fundamental backdrop suggests that the path of least resistance for the USD/JPY pair remains to the downside. Market participants now look to the US economic docket, featuring the Weekly Initial Jobless Claims data, Durable Goods Orders and the revised Michigan Consumer Sentiment Index, for some impetus later during the early North American session.

Technical levels to watch