The Japanese Yen (JPY) continues to weaken against a generally stronger US Dollar (USD) during Monday’s early European session, remaining near last week’s nine-month low. Data released today by the government revealed that Japan’s economy contracted in the July-September period, the first such decline in six quarters. This news, coupled with Prime Minister Sanae Takaichi’s fiscal stimulus plans and support for ultra-loose monetary policy, is dampening expectations for a Bank of Japan (BoJ) rate hike and undermining the JPY. Conversely, the USD is benefiting from reduced odds of another US Federal Reserve (Fed) rate cut in December, helping the USD/JPY pair maintain its position above the 154.45-154.50 supply zone.
However, JPY bears appear hesitant to make aggressive bets due to speculation that Japanese authorities might intervene in markets to curb further depreciation of the domestic currency. Additionally, a weaker risk sentiment in the broader market is helping to limit losses for the safe-haven JPY. Furthermore, concerns about weakening economic momentum stemming from the longest-ever US government shutdown could act as a headwind for the Greenback. These factors suggest caution before anticipating a significant extension of the USD/JPY pair’s recent upward movement seen over the past month. Traders might also await this week’s release of the FOMC meeting Minutes and the delayed US Nonfarm Payrolls (NFP) report for October.
Japanese Yen Bears Retain Control Amid Diminishing Odds for December BoJ Rate Hike and Fiscal Concerns
This Monday, the Cabinet Office reported that Japan’s economy contracted by 0.4% in the July-September period, marking the first decline in six quarters. Moreover, the Gross Domestic Product fell 1.8% year-on-year in the September quarter, following a 2.3% rise in the previous quarter.
While these readings were less severe than consensus estimates, they highlighted limited strength in the Japanese economy. This has prompted investors to reduce their bets on an imminent Bank of Japan interest rate hike, especially amidst growing political resistance, thereby undermining the Japanese Yen.
Japan’s Prime Minister Sanae Takaichi’s administration is currently preparing a stimulus package designed to alleviate the impact of rising living costs on households. Last week, Takaichi announced plans to establish a new multi-year fiscal target, allowing for more flexible spending.
Sharp warnings were exchanged between China and Japan following Takaichi’s remarks regarding the potential use of military force in any Taiwan conflict. China’s threat of severe consequences increases the risk of further escalation and a worsening diplomatic standoff between the two nations.
This escalating tension is weighing on investor sentiment and offering some support to the safe-haven JPY. Meanwhile, the recent decline in the JPY has prompted verbal intervention from Japanese authorities, further deterring JPY bears from placing fresh bets and limiting losses.
Indeed, Japan’s Finance Minister Satsuki Katayama stated last week that she would monitor FX movements with a sense of urgency. Additionally, Japan’s Economy Minister Minoru Kiuchi noted on Friday that a weak JPY could inflate CPI through increased import costs, warranting caution for JPY bears.
Concurrently, a growing number of Federal Reserve policymakers have signaled caution on further easing due to a lack of complete economic data. This is tempering expectations for another interest rate cut by the US central bank in December, which in turn is lending some support to the US Dollar and the USD/JPY pair.
Market attention is now shifting to the delayed release of the closely-watched US Nonfarm Payrolls report on Thursday. In addition, the FOMC meeting minutes and various Fed speeches will be closely scrutinized for clues about the future rate-cut trajectory, which should provide fresh impetus to the Greenback.
USD/JPY Sustained Move Above 155.00 Should Pave the Way for Further Appreciation
From a technical standpoint, the strong rebound witnessed on Friday from the 153.60 support level, which aligns with the 100-period Simple Moving Average (SMA) on the 4-hour chart, and a close above the 154.45-154.50 hurdle, supports a bullish outlook for USD/JPY. Furthermore, daily chart oscillators remain comfortably in positive territory and are not yet in the overbought zone. Sustained buying interest, particularly an acceptance above the psychological 155.00 mark, would reinforce this constructive view and could push spot prices towards the 155.60-155.65 intermediate resistance, ultimately targeting the 156.00 psychological level.
Conversely, any weakness below the immediate support at 154.00 is likely to attract buyers, with solid support anticipated around the 153.60-153.50 region. A decisive breach below this area could see the USD/JPY pair decline towards the 153.00 psychological figure. This level is crucial; a decisive break below it might shift the near-term bias to favor bearish traders, potentially dragging spot prices to the next significant support near the 152.15-152.10 area.
