Japanese Yen seems vulnerable vs bullish amid fiscal woes, Mideast jitters

• USD/JPY gains some follow-through positive traction amid a combination of supporting factors.
• Japan’s fiscal woes undermine the JPY, while a hawkish Fed and Iran risks benefit the Greenback.
• Spot prices remain confined in a range ahead of US inflation data and Fed Chair Warsh’s speech.

The USD/JPY pair attracts buyers for the second straight day, though it lacks strong follow-through and trades below mid-158.00s during the first half of the European session on Monday. Moreover, spot prices remain confined in a familiar range held over the past two weeks or so, warranting caution before placing aggressive directional bets.

The selling bias surrounding the Japanese Yen (JPY) remains unabated due to growing market anxiety over Prime Minister Sanae Takaichi's expansionary fiscal policies and massive public debt. In fact, the government is reportedly considering another supplementary budget to be compiled by November and passed through parliament by the year-end. This, along with the underlying US Dollar (USD) bullish tone, acts as a tailwind for the USD/JPY pair and backs the case for additional gains.

Investors have been pricing out the possibility of a rate hike by the US Federal Reserve (Fed) at the late-October meeting, though expectations for a 25-basis-point (bps) increase in December remain firmly on the table. Moreover, the US-Iran standoff over the Strait of Hormuz, along with intensifying fighting between the Iran-backed Houthis in Yemen and Saudi Arabia, keeps the geopolitical risk premium in play. This further underpins the safe-haven USD and lends support to the USD/JPY pair.

Meanwhile, crude oil prices declined amid hopes that the Russian-Ukraine energy ceasefire will ease global fuel shortages, reducing inflationary risks. This comes on top of the recent minor pullback in US bond yields from multi-year highs and might hold back bulls from placing fresh bets on the USD/JPY pair. Traders might also opt to wait for this week's release of the latest US inflation figures and Fed Chair Kevin Warsh's speech at the annual meetings of the IMF and World Bank in Bangkok on Friday.

USD/JPY daily chart

Technical Analysis

The USD/JPY pair holds a mildly bearish near-term tone, though it remains capped beneath the 100-day Simple Moving Average (SMA) at 159.51. Spot prices hover just above the 50.0% Fibonacci retracement of the latest swing at 158.39, suggesting that while buyers are still defending this mid-range floor, the broader structure is pressured by the overhead 100-day SMA and higher Fibonacci retracements.

Meanwhile, initial resistance is located at the 100-day SMA at 159.51, followed closely by the 61.8% retracement at 159.69, forming a tight supply band, with further hurdles at the 78.6% level at 161.55 and the recent cycle high area near 163.90. On the downside, immediate support is seen at the 50.0% retracement at 158.39. A daily close below there would expose the 38.2% level at 157.09, ahead of deeper retracement supports at 155.48 and the base of the current Fibonacci leg around 152.88.

(The technical analysis of this story was written with the help of an AI tool. Know more.)