The Japanese Yen (JPY) has gained some ground during the Asian session on Friday, building on its overnight recovery against the US Dollar (USD), which saw the pair drop to its lowest level since July 30. This recovery is supported by a combination of factors, including verbal intervention from Japanese authorities and a softer tone in US Treasury bond yields, which has acted as a tailwind for the lower-yielding JPY.
Japan’s government has been vocal in its concerns about excessive currency fluctuations. On Friday, Japan’s Chief Cabinet Secretary, Yoshimasa Hayashi, reiterated that the government would closely monitor currency moves with heightened urgency, while Finance Minister Katsunobu Kato emphasized that Japan would watch the impact of President-elect Donald Trump’s policies on the domestic economy. Japan’s Vice Finance Minister, Atsushi Mimura, further stated that the government is ready to take action if necessary to curb excessive FX moves. These comments follow Japan’s ¥5.53 trillion in currency interventions during the period from June 27 to July 29, according to Ministry of Finance data.
Despite these interventions, some downside risks for the JPY remain. Japan’s household spending and inflation-adjusted wages both fell for the second consecutive month in September, which could hinder the Bank of Japan’s (BoJ) ability to implement a rate hike anytime soon. This weaker domestic economic data, coupled with Japan’s political landscape and a prevailing risk-on mood in the market, may cap further gains for the safe-haven Yen.
Meanwhile, the USD saw some dip-buying on Friday, reversing part of its pullback from a four-month high. This slight recovery in the USD might limit the downside for the USD/JPY pair, even as the Federal Reserve’s decision to cut borrowing costs by 25 basis points on Thursday and its overall dovish tone remain fresh in investors’ minds. With markets pricing in a 75% chance of another rate cut in December, traders have continued to unwind some of their earlier profitable Trump trades, which further limits upside potential for the USD.
Technical Outlook: USD/JPY Tests Key Support, 152.00 Remains Critical for Bulls
From a technical perspective, the USD/JPY pair has seen a sharp pullback, with the overnight decline stalling near the 152.70-152.65 horizontal support zone. This area is now a critical level, and a break below it could trigger further downside, possibly driving the pair towards the 152.00 mark and the 100-day Simple Moving Average (SMA), around the 151.70-151.65 region. If the pair breaks below this key support, it would suggest that the recent bullish momentum from the September monthly swing low has lost steam, opening the door to deeper declines.
On the upside, the immediate resistance is seen at 153.50, followed by a supply zone between 153.85 and 153.90. A move back above the 154.00 mark could reignite buying interest and propel the USD/JPY pair back towards the multi-month peak at 154.70, reached on Thursday. If this level is breached, further upside toward the psychological 155.00 level and the 155.20 zone (July 30 swing high) becomes a possibility.
Market Sentiment and Key Factors to Watch
The outlook for the USD/JPY pair remains mixed, with Japanese authorities remaining on high alert against excessive currency fluctuations, while weaker domestic data from Japan might delay any BoJ tightening. On the other hand, a softer USD amid Fed rate cuts could support the Yen, although USD dip-buying and the risk-on sentiment could limit the downside for USD/JPY.
Traders will be closely watching upcoming data and market developments, particularly any additional intervention by Japanese authorities, as well as signals from the Federal Reserve regarding future interest rate decisions. Any significant shifts in these areas could further influence the direction of USD/JPY in the short term.
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