The Japanese Yen (JPY) has underperformed against a broadly weaker US Dollar (USD), extending losses amid domestic political uncertainty. Expectations that Prime Minister Shigeru Ishiba’s successor may exert pressure on the Bank of Japan (BoJ) to maintain ultra-low interest rates have weighed heavily on the currency.
At the same time, a positive risk sentiment across global markets has further undermined the safe-haven appeal of the JPY, supporting USD/JPY gains. Readers will find a complete breakdown of the issue from Fletrade brokers in their article.
During the Asian session on Friday, the JPY attracted fresh selling interest, reversing the overnight bounce from a three-day low versus the USD. While incoming Japanese macro data signals a potential BoJ rate hike by year-end, these developments have not been sufficient to offset the pressure stemming from political uncertainty and broader risk-on flows.
Domestic Politics Clouds BoJ Policy Outlook
The resignation of Prime Minister Shigeru Ishiba has introduced a layer of political uncertainty, which could temporarily hamper the BoJ’s policy normalization plans. Traders remain cautious, aware that any pressure on the central bank to maintain a dovish stance would act as a headwind for the JPY.
Despite this, optimism surrounding Japan’s economic fundamentals remains. Recent data highlights an upward revision of Q2 GDP, a rise in the Producer Price Index (PPI), higher real wages, and a notable increase in household spending, all of which support the possibility of an imminent BoJ rate hike.
This dichotomy between political uncertainty and strong macro data is keeping the JPY under a modest bearish bias, rather than triggering aggressive selling.
USD Strength Influenced by Fed Policy Expectations
Meanwhile, the US Dollar is experiencing mixed pressures. While dovish bets on the Federal Reserve (Fed) have dragged the USD to its lowest level since July 24, the currency continues to find support from divergent BoJ-Fed policy expectations.
Market participants have increased expectations of three interest rate cuts by the Fed this year, following a rise in US Weekly Initial Jobless Claims, the weak Nonfarm Payrolls report, and softening labor market conditions. Despite higher-than-expected US CPI readings, traders are betting that a 25-basis-point cut at the next FOMC meeting is fully priced in, with two additional cuts expected in October and December, according to the CME Group’s FedWatch Tool.
This dovish Fed outlook has contributed to a decline in the 10-year US Treasury yield to a five-month low, putting additional pressure on the USD while creating upside potential for USD/JPY as the JPY struggles under political headwinds.
Technical Analysis: USD/JPY Vulnerability and Resistance Levels
From a technical perspective, USD/JPY shows resilience below the 147.00 mark, with an overnight bounce favoring the bulls. However, neutral daily chart indicators suggest caution in positioning for aggressive moves.
Resistance levels are key: initial hurdles exist near 148.15–148.20, corresponding to the overnight swing high. A sustained break above could set the stage for a test of the 200-day Simple Moving Average (SMA) near 148.75, followed by 149.00 and the monthly swing high at 149.15. A decisive breach of these levels would likely trigger renewed bullish momentum, attracting further JPY selling interest.
Conversely, support levels provide insight into downside risk. Acceptance below 147.00 exposes 146.30–146.20 pivotal support, with a subsequent break under 146.00 likely accelerating losses toward 145.35 intermediate support and the psychological 145.00 mark. This technical setup aligns with the broader risk-on environment, which continues to weigh on the JPY.
Risk-On Sentiment and Safe-Haven Flows
Global risk sentiment remains favorable, bolstered by Wall Street indices hitting record highs amid growing optimism for Fed rate cuts. This risk-on environment encourages capital flows into higher-yielding assets, further pressuring the safe-haven JPY.
In addition, optimism surrounding the US-Japan trade deal provides some confidence in the USD/JPY pair, while Japanese investors are cautious ahead of BoJ policy meetings and new political developments. As a result, the JPY continues to lag other major currencies, despite expectations of a hawkish BoJ stance.
Outlook and Market Implications
Despite supportive macro factors for the JPY, including potential BoJ rate hikes, the currency’s bearish momentum is likely to persist in the short term. Political uncertainty, combined with positive global risk sentiment, is expected to limit any meaningful upside for the Yen.
Traders will closely monitor Japanese macro releases and the US Consumer Sentiment and Inflation Expectations data from the University of Michigan, which could provide fresh impetus for the USD/JPY pair. Until then, the Yen is likely to experience modest losses, with the pair remaining sensitive to both technical levels and policy divergence between the BoJ and Fed.
