The Japanese yen faced a mild dip against the US dollar on Tuesday, influenced by a devastating earthquake in central Japan. Despite concerns, bets on a Bank of Japan (BoJ) policy shift may limit further Yen losses. However, a dovish outlook for the Federal Reserve hampers the dollar recovery and acts as a headwind for USD/JPY.

The Japanese yen weakened on the first trading day of 2024, impacted by an earthquake in central Japan and a modest greenback recovery from multi-month lows, supported by rising US Treasury bond yields. The USD/JPY pair moved away from its recent low near 140.25, recorded last Thursday.

Anticipation of a BoJ policy shift, possibly in April, curtails deeper JPY losses, with expectations rising after March’s annual wage negotiations. Meanwhile, the Fed’s expected series of interest rate cuts in 2024, starting as early as March, may limit the US dollar and bond yield gains, urging caution for aggressive USD/JPY bullish bets.

Moreover, the JPY’s safe-haven appeal amid geopolitical risks and concerns about China’s economic recovery adds to the overall cautious sentiment. Traders may refrain from significant bets ahead of key events, such as the FOMC minutes on Wednesday and crucial US macro releases later in the week, including the highly-watched NFP report on Friday.

Trade Idea:

Exercise caution in trading USD/JPY, awaiting clear signals of a near-term bottom and substantial follow-through buying, considering potential BoJ policy shifts and Fed rate cut expectations.