The Japanese Yen (JPY) weakened across the board during the Asian session on Wednesday (07/05) as optimism over the US-China trade talks was seen denting demand for traditional safe-haven assets. This comes on top of uncertainty over the likely pace and timing of future interest rate hikes by the Bank of Japan (JPY), which was seen weighing on the JPY. This, along with a modest uptick in the US Dollar (USD), helped the USD/JPY pair to gain some positive traction and snap a three-day losing streak to a near one-week low touched on Tuesday.

However, investors seem convinced that the BoJ could upgrade its outlook, depending on the outcome of the US-Japan trade talks, and raise interest rates again amid signs of broadening inflation in Japan, which could act as a tailwind for the JPY. Moreover, USD investors might refrain from placing any aggressive bets and prefer to wait for more cues on the Federal Reserve's (Fed) rate cut path. This, in turn, could cap any meaningful upside for the USD/JPY pair as traders eagerly await the outcome of today's FOMC policy meeting.

Japanese Yen Weakens on Lower Safe-Haven Demand Amid Hopes of a US-China Trade Deal

US Treasury Secretary Scott Bessent, along with US Trade Representative Jamieson Greer, will travel to Switzerland later this week for trade talks with Chinese Vice Premier He Lifeng. This comes after Bessent on Tuesday said that the Trump administration could announce trade deals with some of its biggest trading partners as early as this week, boosting investor confidence.

This, in turn, was seen denting demand for traditional safe-haven assets and exerted some pressure on the Japanese Yen during the Asian session on Wednesday. On the other hand, the US Dollar moved higher after three consecutive days of declines amid some repositioning trade ahead of the key FOMC decision and lifted the USD/JPY pair back above the 143.00 mark.

The Federal Reserve is widely expected to leave interest rates unchanged at the conclusion of its two-day policy meeting. Hence, the market focus will be on the accompanying policy statement. Additionally, Fed Chair Jerome Powell's comments at the post-meeting press conference will be scrutinized for clues on the path of future rate cuts, which will help the USD in the near term.

Meanwhile, the Bank of Japan reiterated last week that it remains committed to raising interest rates further if the economy and prices move in line with its forecasts. Moreover, expectations that continued wage gains will boost consumer spending and inflation in Japan keep the door open for further policy normalization by the BoJ and a rate hike later this year.

Meanwhile, a Kremlin spokesman warned that an appropriate response would be forthcoming if Ukraine does not stop its actions. Furthermore, Israel's Security Cabinet unanimously approved a plan to expand its military offensive in Gaza and gradually take control of the territory. This keeps geopolitical risks at bay and should limit deeper JPY losses. (Newsmaker23)

Source: FXstreet