Japanese Yen struggles for firm direction as softer USD limits intraday slide

• USD/JPY attracts fresh sellers following an intraday uptick led by Japan’s weak macro data.
• BoJ rate hike bets and looming intervention risks support the JPY, capping gains for the pair.
• A softer USD further acts as a headwind for spot prices, though the downside seems limited.

The USD/JPY pair struggles to capitalize on a modest Asian session uptick on Friday, now trading near the lower end of its daily range, below the 158.00 mark amid a broadly weaker US Dollar (USD). Spot prices, however, remain confined in a familiar range held over the past week or so amid mixed fundamental cues.

The Japanese Yen (JPY) weakened a bit after data released earlier today showed that Japan’s Household Spending shrank for a ninth successive month in August. Meanwhile, the fall was less than expected, which comes on top of an increase in Japan’s real wages for the eighth month in a row and reaffirms bets for further policy tightening by the Bank of Japan (BoJ). Furthermore, traders remain on high alert amid speculation that authorities will step in to prop up the JPY. This, along with a modest USD weakness, acts as a headwind for the USD/JPY pair.

BoJ’s gradual tightening chips away at Yen’s carry appeal

Rabobank’s FX strategists note that, “despite announcing an as expected rate hike at its September policy meeting, the BoJ’s guidance was not as hawkish as the market had hoped for.” Even so, they argue that “the BoJ’s policy of gradually raising interest rates is still eroding the JPY’s funding currency appeal,” as the steady tightening cycle undermines the Yen’s traditional role as a low-cost vehicle for carry trades.

President Donald Trump said on Thursday that the US will not resume military strikes on Iran before the November 3 midterm congressional election, keeping a lid on crude oil prices and easing concerns over runaway inflation. Adding to this, a 30-year bond auction met with solid demand and triggered a corrective decline in US Treasury yields, dragging the USD Index (DXY), which tracks the Greenback against a basket of currencies, away from an 18-month top. This further contributes to keeping a lid on any meaningful upside for the USD/JPY pair.

Meanwhile, traders are still pricing in over an 80% chance that the US Federal Reserve (Fed) will raise borrowing costs in December. Apart from this, persistent geopolitical uncertainties stemming from the US-Iran standoff over Tehran's nuclear program could support the safe-haven buck and the USD/JPY pair. In fact, Iran's head of the Atomic Energy Organization, Mohammad Eslami, was quoted as saying that the country will not stop uranium enrichment or give up its uranium stockpile. This keeps the geopolitical risk premium in play and favors USD bulls.

Nevertheless, the aforementioned mixed fundamental backdrop is holding back traders from placing aggressive directional bets, leading to the USD/JPY pair's range-bound price action. Market participants now look forward to the release of the Preliminary University of Michigan US Consumer Sentiment and Inflation Expectations Index. Furthermore, speeches from influential FOMC members and the incoming geopolitical headlines will drive USD demand, which, in turn, might produce short-term opportunities heading into the weekend.

USD/JPY 4-hour chart

Technical Analysis

The USD/JPY pair maintains a bullish near-term bias as it holds above the 100-period Simple Moving Average (SMA) on the 4-hour chart. Moreover, the recent range-bound action might still be categorized as a bullish consolidation phase, suggesting the broader uptrend remains intact despite the lack of a strong buying interest.

Meanwhile, initial support is seen at the 157.59 area, where the 100-period SMA offers underlying demand and would be expected to cushion deeper pullbacks while it holds. On the top side, the 158.50 region, or the top end of the trading range, could act as an immediate hurdle and a sustained strength beyond will reaffirm the positive outlook.

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