Japanese Yen edges higher but faces headwinds from delayed BoJ hike bets

• The Japanese Yen recovers from an over seven-month low against its American counterpart.

• Expectations that Takaichi's policies could delay BoJ rate hikes might cap gains for the JPY.

• The Israel-Hamas peace deal boosts investors’ appetite and acts as a headwind for the JPY.

The Japanese Yen (JPY) edges higher during the Asian session on Thursday and moves away from a nearly eight-month low, touched against its American counterpart the previous day. Japanese Finance Minister Katsunobu Kato, earlier this week, warned against forex volatility amid the recent slump in the domestic currency. Moreover, bets for another interest rate hike by the Bank of Japan (BoJ) remain on the table, which turns out to be another factor offering some support to the JPY.

Any meaningful JPY appreciation, however, seems elusive in the wake of growing concerns about the fiscal outlook in Japan. In fact, Sanae Takaichi, who is expected to become Japan's first female Prime Minister, is a big supporter of aggressive government spending and is expected to oppose further policy tightening by the BoJ. Moreover, the Israel-Hamas agreement to the first phase of the peace deal boosts the global risk sentiment and might contribute to capping gains for the safe-haven JPY.

Japanese Yen bulls seem non-committed amid diminishing odds for an immediate BoJ rate hike

Japan's Finance Minister Katsunobu Kato said earlier this week that the government will be vigilant for volatile movements on the currency market, and it's important for currencies to move in a stable manner reflecting fundamentals.

Sanae Takaichi's surprise win in the ruling Liberal Democratic Party's (LDP) leadership race last Saturday puts her on course to become the first female Prime Minister and fueled speculations about more expansionary fiscal policy.

Traders are now pricing in a 26% chance that the Bank of Japan will raise interest rates at its next meeting on October 30, down from around 60% last Friday. This has been weighing on the Japanese Yen since the beginning of this week.

Takaichi's economic advisors – Etsuro Honda and Takuji Aida – were quoted as saying that the new PM would probably tolerate another interest rate hike either in December or in January, though the path beyond that remains unclear.

Moreover, inflation in Japan has stayed at or above the BoJ’s 2% target for more than three years, and the economy expanded for a fifth straight quarter in the three months through June, keeping hopes alive for another BoJ hike this year.

Minutes from the Federal Reserve’s September meeting released on Wednesday indicated near unanimity among participants to lower interest rates amid concern about labour market risks and a more balanced inflation outlook.

Policymakers, however, remained split on whether there should be one or two more rate reductions before the end of this year. Nevertheless, the overall tone was cautious and pointed to a continued easing bias.

In fact, the CME Group's FedWatch Tool indicates that traders are still pricing in a greater possibility of 25-basis-point rate cut at each of the two remaining policy meetings this year, in October and in December.

US President Donald Trump said on Wednesday that Israel and Hamas have agreed to the first phase of his 20-point peace plan to pause fighting and release at least some hostages and prisoners, undermining safe-haven assets.

Traders now look forward to Fed Chair Jerome Powell's speech for more cues about the future rate-cut path. This, in turn, will influence the US Dollar price dynamics and provide some meaningful impetus to the USD/JPY pair.

USD/JPY is likely to attract some dip-buyers and find decent support near the 152.00 mark

The daily Relative Strength Index (RSI) remains close to the overbought zone and holds back traders from placing fresh bullish bets around the USD/JPY pair. Any subsequent pullback, however, is likely to attract fresh buyers and remain cushioned near the 152.00 round figure. This is followed by the overnight swing low, around the 151.70 region, which, if broken, might prompt some technical selling and drag spot prices to the 151.00 strong horizontal resistance breakpoint.

On the flip side, the 153.00 round figure, or a multi-month peak touched on Wednesday, now seems to act as an immediate hurdle. A sustained strength beyond the said handle will reaffirm the positive outlook and lift the USD/JPY pair to the next relevant hurdle, near the 153.70-153.75 region, before bulls eventually aim to reclaim the 154.00 mark for the first time since February 12.