JPY struggles to capitalize on intraday gains amid BoJ rate-hike uncertainty

• The Japanese Yen strengthened on Thursday in reaction to hawkish BoJ meeting Minutes.
• Domestic political uncertainty and US tariff concerns cap any meaningful gains for the JPY.
• Traders now look to Tokyo CPI and the US PCE Price Index on Friday for a fresh impetus.

The Japanese Yen (JPY) sticks to the hawkish Bank of Japan (BoJ) Minutes-inspired gains through the Asian session on Thursday, though it lacks bullish conviction and remains close to a three-week low touched against the US Dollar (USD) the previous day. Investors remain concerned that domestic political uncertainty and economic headwinds stemming from US tariffs could give the BoJ more reasons to delay raising interest rates. This, in turn, is acting as a headwind for the JPY.

Nevertheless, traders seem convinced that the BoJ will stick to its policy normalization path and are pricing in a rate hike in October. This marks a significant divergence in comparison to bets that the US Federal Reserve (Fed) will lower borrowing costs two more times by the end of this year. The latter keeps a lid on the overnight US Dollar (USD) rally to a two-week low. Moreover, the narrowing US-Japan rate differential should benefit the lower-yielding JPY and cap the USD/JPY pair.

Japanese Yen bulls seem non-committed as political uncertainty counters BoJ’s hawkish outlook

• Minutes from the Bank of Japan’s policy meeting held in July, released earlier this Thursday, showed that board members called for resuming interest rate hikes in the future. Many members said the US–Japan trade deal reduced uncertainty in the outlook, but tariffs still need close scrutiny for their impact on the economy and prices.
• This backs the case for an imminent BoJ rate hike this year and provides a modest lift to the Japanese Yen (JPY) during the Asian session on Thursday. Meanwhile, the intraday uptick seems unaffected by the release of softer Services PPI from Japan, which decelerated from the 2.9% YoY rate in the previous month and rose 2.7% in August.
• Japan’s Liberal Democratic Party (LDP) leadership election will take place on 4 October, and the outcome could delay the next interest rate hike by the BoJ if a candidate with dovish views is selected. This, in turn, adds a layer of uncertainty and might hold back the JPY bulls from placing aggressive bets amid concerns about higher US tariffs.
• The US Dollar is seen consolidating the previous day’s strong move up to a two-week high amid mixed Federal Reserve rate cut cues. The US central bank last week penciled in two more rate cuts by the end of this year after lowering borrowing costs by 25 basis points for the first time since December amid signs of a softening labor market.
• However, Fed Chair Jerome Powell signaled caution and said on Tuesday that the rate-cut path remains uncertain amid sticky inflation and a softening US labor market. Powell added that easing too aggressively could leave the inflation job unfinished and need to reverse course, which could act as a tailwind for the buck and the USD/JPY pair.
• Traders now look to Thursday’s US economic docket – featuring the final Q2 GDP print, Weekly Initial Jobless Claims, and Durable Goods Orders. The focus, however, remains glued to key inflation figures on Friday – Tokyo CPI and the US Personal Consumption Expenditure (PCE) Price Index, or the Fed’s preferred inflation gauge.

USD/JPY bulls have the upper hand; 200-day SMA breakout remains in play

From a technical perspective, the overnight close above the 200-day Simple Moving Average (SMA) for the first time since July 31 could be seen as a fresh trigger for the USD/JPY bulls. Moreover, oscillators on the daily chart have been gaining positive traction and suggest that the path of least resistance for spot prices remains to the upside. Some follow-through buying beyond the 149.15 area, or the monthly peak, will reaffirm the constructive outlook and allow the pair to aim towards reclaiming the 150.00 psychological mark. The momentum could extend further towards the 150.55-150.60 intermediate hurdle en route to the 151.00 neighborhood, or the late-July/early-August swing high.

On the flip side, weakness below the 200-day SMA, currently pegged near mid-148.00s, could be seen as a buying opportunity and is more likely to remain limited near the 148.00 round figure. The latter might now act as a strong base for the USD/JPY pair, which, if broken decisively, might prompt some technical selling and expose the 147.20 support zone. The subsequent fall below the 147.00 mark will negate the positive outlook and shift the near-term bias in favor of bearish traders. This should pave the way for a slide towards the 146.40 region en route to the 146.00 mark and the 145.50-145.45 region, or the lowest level since July 7 touched last week.

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