• USD/JPY meets with a fresh supply and reverses a part of the overnight recovery gains.
• The divergent Fed-BoJ policy expectations underpin the JPY and exert some pressure.
• Investors look to the critical Fed decision ahead of the key BoJ policy update on Friday. 

The USD/JPY pair attracts fresh sellers during the Asian session on Wednesday and slides back below the 142.00 mark in the last hour, eroding a part of the overnight gains and stalling its recovery from the lowest level since July 2023 touched earlier this week. Meanwhile, the fundamental backdrop suggests that the path of least resistance for spot prices is to the downside, though traders might refrain from placing aggressive bets ahead of the key central bank event risks.

The Federal Reserve (Fed) is scheduled to announce its decision at the end of a two-day meeting later this Wednesday and is universally expected to kick start its policy easing cycle. The market attention will then shift to the Bank of Japan (BoJ) policy update on Friday, which will play a key role in influencing the Japanese Yen (JPY) and provide a fresh directional impetus to the USD/JPY pair. In the meantime, the cautious market mood, along with the divergent Fed-BoJ policy expectations, drives some haven flows towards the JPY and turns out to be a key factor exerting downward pressure on the USD/JPY pair. 

The markets have been pricing in a greater chance of an oversized, 50 basis points (bps) interest rate cut by the Fed amid signs of easing inflationary pressures. This overshadows Tuesday's better-than-expected release of the US Retail Sales data and fails to assist the US Dollar (USD) to build on the overnight bounce from the 2024 low. In contrast, the recent hawkish signals from BoJ officials suggest that the Japanese central bank will hike rates again by the end of this year. This has been a key factor behind the JPY's recent relative outperformance and contributes to the offered tone surrounding the USD/JPY pair.