Japanese Yen recovers a bit from three-month low against USD, lacks bullish conviction

The Japanese Yen edges higher on Thursday, though the upside potential seems limited.
The BoJ rate-hike uncertainty should cap the JPY ahead of the general election on Sunday.
Bets for a less aggressive Fed policy easing favor the USD bulls and lend support to USD/JPY.

The Japanese Yen (JPY) is seen oscillating in range against its American counterpart during the Asian session on Thursday and consolidating the previous day's slump to the lowest level since July 31. The near-term bias, meanwhile, seems tilted in favor of the JPY bears amid the prospects of election-related uncertainty in Japan, which raises doubts over the Bank of Japan's (BoJ) ability to hike interest rates further this year.

Moreover, the recent upswing in the US Treasury bond yields, bolstered by bets for a less aggressive policy easing by the Federal Reserve (Fed) and deficit-spending concerns after the US election, should cap gains for the lower-yielding JPY. Adding to this, the underlying strong bullish sentiment surrounding the US Dollar (USD) suggests that the path of least resistance for the USD/JPY pair remains to the upside.

Daily Digest Market Movers: Japanese Yen remains vulnerable amid doubts over additional BoJ rate hikes in 2024

A private-sector survey released earlier this Thursday showed that business activity in Japan's manufacturing and services sectors contracted in October, pointing to weaker overall economic conditions in the country.
The Au Jibun Bank flash Manufacturing PMI declined to 49.0 in October from the 49.7 previous, marking the fourth straight month of contraction on the back of subdued local and overseas demand, and weak orders.
Adding to this, the au Jibun Bank flash services PMI contracted for the first time since June and fell to 49.3 during the reported month, while the composite PMI dropped to 49.4 in October from 52 in the prior month.
Recent opinion polls indicate that Japan's ruling Liberal Democratic Party (LDP) could lose its majority after the upcoming general election on October 27, fueling uncertainty about the Bank of Japan's rate-hike plans.
The yield on the benchmark 10-year US government bond shot to a three-month high on Wednesday amid market conviction that the Federal Reserve will proceed with modest interest rate cuts over the next year.
The odds of former President Donald Trump winning the November 5 US presidential election fuel speculations about the launch of potentially inflation-generating tariffs that will keep the US bond yields elevated.
The US Dollar retreated a bit from its highest level since late July touched on Wednesday as bulls opt to take some profits off the table following the recent upsurge witnessed since the beginning of this month.
The release of flash US PMI prints, along with the US bond yields, will influence the USD price dynamics later during the North American session and provide short-term impetus to the USD/JPY pair.

Technical Outlook: USD/JPY stalls its upward trajectory near the 61.8% Fibo. level, bullish potential seems intact

From a technical perspective, Tuesday's breakout above the 150.65 confluence hurdle and the 200-day Simple Moving Average (SMA) was seen as a fresh trigger for bullish traders. The subsequent move up, however, stalls near the 61.8% Fibonacci retracement level of the July-September downfall amid a slightly overbought Relative Strength Index (RSI) on the daily chart. The said barrier is pegged near the 153.20 area and should now act as a key pivotal point, which if cleared decisively should pave the way for an extension of over a one-month-old uptrend. The USD/JPY pair might then aim to reclaim the 154.00 mark and climb further towards the 154.30 supply zone. The momentum could extend further towards the 154.75 horizontal zone en route to the 155.00 psychological mark and the July 30 swing high, around the 155.20 region.

On the flip side, any meaningful corrective slide now seems to find decent support near the 152.00 round figure. A convincing break below could drag the USD/JPY pair further towards the 151.45-151.40 intermediate support en route to the 151.00 mark, though the fall might still be seen as a buying opportunity. This should help limit the downside near the aforementioned confluence resistance breakpoint, now turned support, near the 150.65 region, which should now act as a strong base for spot prices. Sustained weakness below, however, will suggest that the upward momentum has run out of steam and shift the near-term bias in favor of bearish traders.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.