The Japanese Yen has stopped trading the Federal Reserve

In recent weeks, the Japanese Yen (JPY) has remained relatively stable against the Federal Reserve's dollar (USD), despite the Federal Reserve raising its odds of raising interest rates in September to 58% from 49.4%. This stability is due to the Bank of Japan's (BoJ) policy of maintaining a low interest rate of 1% since June. The U.S. dollar leg of the pair is no longer driving the trade, and instead, the focus has shifted to the path of interest rate expectations.

On September 2, USD/JPY touched its highest level in six months at just above 160.00, but since then, it has given up roughly six Yen, falling to around 154.00. The U.S. data released in the middle of this run did not interrupt the trend. The recent Federal Reserve meeting and the Bank of Japan's policy path are now the primary factors influencing the currency pair.

The bond market has moved ahead of the Fed and BoJ, with the 10-year Japanese Government Bond (JGB) yield breaking the 3% barrier for the first time since 1996, and the two-year JGB yield reaching its highest level since 1995. This has caused a shift in the market's expectations for the interest rate differential between the U.S. and Japan.

The Federal Reserve's meeting on September 15-16 and the Bank of Japan's meeting on September 17-18 are the key events to watch in the coming days. Resistance levels for the Yen are at 154.50 and 156.00, while support is found at the 154.00 handle. The daily Stochastic Relative Strength Index (Stoch RSI) has fallen to 82, indicating no oversold conditions to support a bounce. Therefore, traders should remain bearish while watching for a daily close above 155.50 to invalidate the bearish outlook.