Japanese Yen pulls back slightly after hitting fresh monthly high vs broadly weaker USD

• USD/JPY attracts heavy selling on Thursday as declining US bond yields keep the USD depressed.
• BoJ rate hike bets and intervention risks boost the JPY, contributing to the pair’s steep decline.
• Geopolitical risks and hawkish Fed expectations could limit USD losses, supporting spot prices.

The USD/JPY pair comes under intense selling pressure on Thursday, breaking through a short-term trading range support near mid-157.00s and hitting a fresh monthly low during the early European session. Spot prices, however, recovered a few pips in the last hour and currently trade just above the 157.00 mark, still down over 0.60% for the day.

US Federal Reserve (Fed) officials recently signaled that there is no urgency to raise interest rates at the upcoming October 27–28 policy meeting. Furthermore, US bond yields extend their retracement slide from multi-year highs, dragging the US Dollar (USD) to a three-week trough and narrowing the US-Japan rate differential. Adding to this, more hawkish signals from the Bank of Japan (BoJ) provide a goodish lift to the lower-yielding Japanese Yen (JPY), exerting additional pressure on the USD/JPY pair.

In fact, BoJ Governor Kazuo Ueda indicated earlier this week that underlying inflation is nearing the central bank's 2% target, strengthening market expectations for an imminent interest rate hike in December. Moreover, traders remain on high alert amid speculation that attempts to breach the key 160.00 psychological mark could trigger direct currency intervention from Japanese authorities. Apart from this, technical selling below the 157.50 support contributes to the USD/JPY pair's downfall.

Meanwhile, the geopolitical risk premium remains in play amid fears of a further escalation of tensions in the Middle East. The New York Times reported that the US and Israel have drawn up plans for a short but intense military campaign against Iran after the US midterm elections. Iran's Foreign Minister, Abbas Araghchi, stated that the country is prepared for diplomacy while also emphasizing its readiness to defend itself. This, along with December Fed rate hike bets, could support the USD and the USD/JPY pair.

The CME Group's FedWatch Tool indicates that traders are now pricing in around a 90% chance that the US central bank will raise borrowing costs again by the end of this year. Moreover, oil-driven inflationary concerns underpin prospects for further Fed tightening, which could limit losses for the buck and the USD/JPY pair. Traders might also refrain from placing fresh directional bets ahead of next week's central bank events – the FOMC decision on October 28, followed by the BoJ meeting on October 29-30.

USD/JPY daily chart

Technical Analysis

An intraday breakdown through a short-term range could be seen as a fresh trigger for bearish traders. Moreover, the USD/JPY pair holds below the 100-day Simple Moving Average (SMA) at 159.39 and the 50% Fibonacci retracement at 158.42, maintaining a mildly bearish near-term bias. However, acceptance below the 38.2% retracement around 157.10 is needed to back the case for further losses toward the 23.6% level near 155.47, while a deeper pullback would expose the structural floor around 152.83.

On the topside, immediate resistance emerges at the 50% Fibo. level near 158.42, with the 100-day SMA at 159.39 and the 61.8% retracement at 159.74 forming a broader supply zone, ahead of higher barriers at 161.61 and 164.00.

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