• USD/JPY rebounds after the heavy sell-off on Monday. 
• US Dollar traders are buying the dip after possible intervention by the authorities pulled USD/JPY down. 
• The interest rate differential between Japan and the US is likely to maintain a bullish pressure on the pair. 

USD/JPY is trading up about a third of a percentage point in the 156.90s on Tuesday as traders buy the dip after the rumored currency-intervention sell-off on the previous day. 

USD/JPY peaked at a 34-year high of 160.32 on Monday but then rolled over and fell following a rumored currency intervention by the Japanese authorities who have been warning about the Yen weakening excessively ever since USD/JPY rose above 150.00 in March. 

Japan's top currency diplomat, Masato Kanda, refused to confirm whether the authorities had intervened when questioned by the media on Tuesday morning, saying simply that the Ministry of Finance will release figures on currency intervention at the end of May.  

He did, however, repeat his warnings about the risks of an excessive weakening of the Japanese Yen (JPY), saying “Currency impact has a bigger impact on import prices now,” and that “Excessive FX moves could impact on daily lives,” and we “Need to take appropriate actions on FX.”

The US Dollar Index (DXY) has recovered and is trading marginally higher at the time of writing as USD bulls undertake some mild buying ahead of the US Federal Reserve’s (Fed) policy meeting on Wednesday. 

The Fed is not expected to make any changes to its monetary policy settings at the meeting, though rhetoric from Federal Reserve Chairman Jermome Powell may impact expectations. According to market based gauges of Fed policy such as the CME FedWatch tool there is only a 2.7% probability the Fed will implement an interest-rate cut. 

As such the Fed will probably maintain the key Fed Funds Rate at its current 5.25% - 5.5% level. This is still substantially higher than the Bank of Japan’s cash rate of 0.0% - 0.1%. The difference favors the US Dollar as investors like to park their money where it can earn more interest. This in turn is likely to continue pressuring gains in USD/JPY regardless of whether the Japanese authorities intervene. 

Most analysts see intervention attempts as futile without support from higher interest rates. But higher interest rates are unlikely given trend inflation continues to track below the BoJ’s 2.0% target and recent Tokyo CPI data showed CPI inflation falling well below expectations in April further lessening the likelihood of the BoJ rushing to support its currency with higher interest rates.