USD/JPY extends upside near 157.50 as BoJ remains cautious on policy

• USD/JPY gains traction around 157.50 on Monday, up 0.08% on the day. 
• The hawkish stance from the US Fed supported the Greenback, despite the weaker-than-expected Michigan Consumer Sentiment Index data. 
• BoJ kept short-term rate target unchanged and could reduce its purchases of JGBs after the next monetary policy meeting.

The USD/JPY pair extends the rally near 157.50 during the early Asian session on Monday. The hawkish stance from the US Federal Reserve (Fed) provides some support to the pair. Meanwhile, the Japanese Yen (JPY) loses ground as the Bank of Japan (BoJ) decided to keep its interest rate at 0% at the conclusion of its June policy meeting on Friday. 

The Fed held interest rates steady at their current range of 5.25% to 5.5% at the latest policy meeting last week, as widely expected by consensus. Furthermore, it revised its outlook for rate cuts to just one in 2024. Fed Chair Jerome Powell said during the press conference that the central bank does not yet have the confidence to cut rates and he needs more convincing evidence that inflation was moving to the 2% target. On Sunday, Minneapolis Fed President Neel Kashkari noted that it is a “reasonable prediction” that the Fed will wait until December to cut interest rates, adding that the Fed is in a very good position to get more data before making any decisions. 

On Friday, the preliminary report of the Michigan Consumer Sentiment Index, a monthly survey of consumer confidence levels in the US fell to a 7-month low at 65.6 in June from 69.1 in the previous reading, below the forecast of 72.0. Nonetheless, the downbeat Consumer Sentiment data had little to no impact on the Greenback. 

On the JPY’s front, the BoJ kept its benchmark interest rate unchanged between 0% to 0.1% at the end of its two-day policy meeting on Friday but indicated it could reduce its purchases of Japanese government bonds after the next monetary policy meeting in July. The BoJ Governor Kazuo Ueda also said he would not rule out raising interest rates in July as weakness in the Japanese Yen (JPY) pushes up import costs. ”Decision suggests that the BoJ is very careful about reducing the bond buying amounts, which means the central bank is also cautious about raising rates,” said Takayuki Miyajima, senior economist at Sony Financial Group. Such a dovish stance from the BoJ continues to undermine the JPY and acts as a tailwind for USD/JPY.