Fed-BoJ Policy Divergence Fails to Boost Dollar/Yen

The divergence in monetary policy expectations between the Federal Reserve and the Bank of Japan has not had the expected impact on the US dollar against the Japanese yen.

Investors have scaled back their bets on a September Fed rate hike, citing weak US data, including disappointing non-farm payrolls for July, slower inflation, and declining retail sales. The latest rise in oil prices following Trump's threats has not been enough to boost expectations of higher interest rates from the Fed.

The Bank of Japan, on the other hand, is seen raising its policy rate to 2% by the end of 2027, with a strong 65% chance of a rate hike at the upcoming meeting in September. Japanese yields have surged, but not only due to speculation about BoJ rate hikes.

Despite the risks surrounding the dollar/yen pair being tilted to the upside, traders are unlikely to buy the yen, given its low interest rates and concerns about Prime Minister Takaichi's fiscal plans. The Bank of Japan may struggle to become significantly more hawkish than it currently is, with Takaichi potentially influencing the BoJ's decision-making by selecting dovish members for Board positions.

From a technical standpoint, dollar/yen has staged a strong recovery but was rejected near 159.75. A break above the psychological round figure of 160.00 may be needed for the bulls to recharge and aim higher.