Japanese Yen weakens on BoJ rate hike delay, US tariff worries, ahead of US PCE data

• The Japanese Yen continues to be undermined by expectations that the BoJ might delay rate hikes.

• Domestic political uncertainty and US tariff concerns also contribute to the JPY’s recent steep fall.

• The USD pauses for a breather ahead of the US PCE data and caps the upside for the USD/JPY pair.

The Japanese Yen (JPY) slides to a fresh low since early August against its American counterpart following the release of softer-than-expected consumer inflation figures from Japan's capital city, Tokyo. This comes on top of domestic political uncertainty, which, along with concerns about economic headwinds stemming from US tariffs, could allow the Bank of Japan (BoJ) to delay raising interest rates and undermine the JPY. Moreover, the recent US Dollar (USD) rally to a three-week top lifts the USD/JPY pair to the 150.00 neighborhood during the Asian session on Friday.

Meanwhile, US President Donald Trump announced a new round of punishing tariffs on a broad range of imported goods and tempered investors' appetite for riskier assets, which, in turn, offers some support to the safe-haven JPY. Furthermore, the USD bulls refrain from placing aggressive bets and opt to wait for the release of the US Personal Consumption Expenditure (PCE) Price Index later during the North American session. This, in turn, keeps a lid on the USD/JPY pair. Nevertheless, spot prices remain on track to register strong gains for the second consecutive week.

Japanese Yen bears retain control as softer Tokyo CPI print fuels BoJ rate hike uncertainty

The Statistics Bureau of Japan reported earlier this Friday that the headline Tokyo Consumer Price Index (CPI) rose 2.5% from a year earlier in September, down slightly compared to 2.6% in the previous month and missing consensus estimates. Adding to this, Tokyo CPI ex Fresh Food remained unchanged and rose 2.5% YoY during the reported month against 2.8% expected.

Furthermore, a core gauge, which excludes both Fresh Food and Energy prices, and is closely watched by the Bank of Japan as a gauge of underlying inflation, eased to 2.5% in September from 3.0% in the previous month. This undermines the Japanese Yen and drags it to a fresh low since early August against a broadly firmer US Dollar during the Asian session on Friday.

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 adds a layer of uncertainty amid concerns about economic headwinds stemming from US President Donald Trump's 15% baseline tariff on most Japanese imports.

Meanwhile, Trump on Thursday announced a 100% tariff on imports of branded or patented pharmaceutical products, 25% levies on imports of all heavy-duty trucks, and 50% tariffs on kitchen cabinets from October 1. Trump also said he would start charging a 30% tariff on upholstered furniture next week. This underpins the JPY's safe-haven status and limits losses.

The US Dollar, on the other hand, holds steady near a three-week high, as stronger-than-expected US economic data released on Thursday fueled uncertainty over the pace of interest rate cuts by the Federal Reserve. The revised US GDP print showed that the economy grew at an annualised 3.8% pace during the second quarter compared to the 3.3% estimated initially.

Adding to this, the US Labor Department reported that Initial Jobless Claims fell to 218K for the week ending September 20, well below the 235K expected and the previous week’s 232K (revised from 231K). This helps ease concerns about a softening labor market and raises questions as to how much the Fed may cut interest rates again by the end of this year.

Nevertheless, traders are still pricing in a greater chance that the US central bank will lower borrowing costs again in October and December. This keeps a lid on any further USD gains and caps the USD/JPY pair. Traders also seem reluctant to place fresh bullish bets and opt to wait for the release of the US Personal Consumption Expenditure (PCE) Price Index.

USD/JPY could appreciate beyond the 150.00 psychological mark

The USD/PY pair's strong rise on Thursday reaffirmed this week's breakout through a technically significant 200-day Simple Moving Average (SMA) hurdle. Given that oscillators on the daily chart are holding comfortably in positive territory and are still away from being in the overbought zone, some follow-through buying beyond the 150.00 psychological mark should pave the way for additional gains. Spot prices might then aim towards testing the August monthly swing high, around the 151.00 neighborhood, with some intermediate hurdle near the 150.55-150.60 region.

On the flip side, any meaningful corrective pullback might now find decent support and attract fresh buyers near the 149.15 region. This should help limit the downside for the USD/JPY pair near the 149.00 mark, which, if broken, could pave the way for a slide towards retesting the 200-day SMA, currently pegged near mid-148.00s. Failure to defend the said support levels might negate the near-term positive outlook and drag spot prices below the 148.00 round figure, towards testing the weekly swing low, around the 147.50-147.45 region.