Japanese Yen gains on BoJ rate hike bets, USD/JPY pressured by dovish Fed and weaker USD

• The Japanese Yen gains some follow-through positive traction amid reviving BoJ rate hike bets.
• Dovish Fed expectations weigh on the USD and exert additional pressure on the USD/JPY pair.
• The upbeat market mood and fiscal concerns could act as a headwind for the safe-haven JPY.

The Japanese Yen (JPY) attracts some dip-buyers during the Asian session on Wednesday in reaction to a news piece that the Bank of Japan (BoJ) is ramping up rate hike messaging. Adding to this, Japan's Services Producer Price Index released earlier today underscored the BoJ's view that a tight job market will keep pushing up wages and service-sector inflation, reinforcing bets for further policy tightening. In contrast, traders are now pricing in a greater chance that the US Federal Reserve (Fed) will lower borrowing costs again in December, which dragged the US Dollar (USD) to a one-week low. Moreover, the divergent BoJ-Fed policy outlooks keep the USD/JPY pair depressed below the 156.00 mark.

Meanwhile, the decision between a December or January rate hike by the BoJ is still finely balanced. Moreover, concerns about Japan's ailing fiscal position on the back of Prime Minister Sanae Takaichi’s pro-stimulus stance, along with the prevalent risk-on environment, could act as a headwind for the safe-haven JPY. Nevertheless, the broader fundamental backdrop suggests that the path of least resistance for the JPY is to the upside. Hence, any intraday pullback might now be seen as a buying opportunity amid speculations that authorities could step in to stem further JPY weakness. Traders now look to the US macro data for a short-term impetus later during the North American session.

Japanese Yen bulls look to seize control amid rising December BoJ rate hike bets

• Reuters reported this Wednesday that the Bank of Japan, over the past week, has intentionally shifted messaging to highlight the inflationary risks of a persistently weak Japanese Yen, suggesting that a December rate hike remains a live option. The change followed a key meeting between Prime Minister Sanae Takaichi and BoJ Governor Kazuo Ueda last week, which appeared to remove immediate political objections to rate hikes from the new administration.
• Meanwhile, data from the BoJ showed that the Services Producer Price Index, which tracks the price companies charge each other for services, rose 2.7% in October from a year earlier. This marked a notable slowdown from a revised 3.1% increase recorded in the previous month, though it suggests that Japan was on the cusp of durably meeting its 2% inflation target. This backs the case for further BoJ policy tightening and boosts the JPY during the Asian session.
• The US Dollar (USD), on the other hand, slides to a one-week low in the aftermath of unimpressive US macro data released on Tuesday, which reaffirmed market expectations for another interest rate cut by the US Federal Reserve in December. Adding to this, Fed Governor Stephen Miran echoed the dovish view and said in a television interview on Tuesday that a deteriorating job market and the economy call for large interest rate cuts to get monetary policy to neutral.
• The prospect of lower US interest rates boosts investors' appetite for riskier assets amid hopes for a peace deal between Russia and Ukraine. President Volodymyr Zelenskiy said on Tuesday that Ukraine is ready to advance a US-backed framework for ending the war with Russia. This might cap the safe-haven JPY as traders look to the delayed release of US Durable Goods Orders, along with the US Weekly Initial Jobless Claims, for a fresh impetus around the USD/JPY pair.

USD/JPY mixed technical setup warrants caution for aggressive bearish traders

The USD/JPY pair now seems to have found acceptance below the 100-hour Simple Moving Average (SMA) and the 38.2% Fibonacci retracement level of the recent move up from the monthly low. Moreover, negative oscillators on hourly charts back the case for additional losses. However, technical indicators on the daily chart are holding in positive territory, suggesting that any further slide is more likely to find decent support near the 155.30 region, or the 50% retracement level. This is followed by the 155.00 psychological mark, which, if broken decisively, will be seen as a fresh trigger for bearish traders and pave the way for deeper losses.

On the flip side, any attempted recovery back above the 156.00 mark now seems to confront an immediate hurdle near the Asian session high, around the 156.35 region. Sustained strength beyond the latter could trigger a short-covering move and allow the USD/JPY pair to reclaim the 157.00 round figure. Some follow-through buying might then set the stage for additional gains toward the 157.45-157.50 intermediate hurdle en route to the 158.00 neighborhood, or the highest level since mid-January, touched last week.