USD/JPY strengthens above 154.00 on Fed’s hawkish tone

• USD/JPY edges higher to around 154.20 in Tuesday’s early Asian session. 

• Traders dialed back bets for further Fed rate cuts, boosting the US Dollar. 

• The US  government shutdown is poised to become the longest in US history this week. 

The USD/JPY pair gathers strength to near 154.20 during the early Asian session on Tuesday. The US Dollar (USD) edges higher against the Japanese Yen (JPY) on the likelihood that the US Federal Reserve (Fed) might hold its interest rate in December. The Fed’s Bowman is set to speak later in the day. 

The Fed decided to cut its interest rates by 25 basis points (bps) last week, as widely expected. Nonetheless, Chair Jerome Powell signaled that it may be the last cut this year, emphasizing the risks of making further reductions without a more solid picture of the economy. Fed’s hawkish tone could provide some support to the Greenback against the JPY. Traders are now pricing in a nearly 70% possibility of a 25 bps cut in December, down from about 94% odds a week ago, according to the CME FedWatch tool. 

On the other hand, the ongoing US federal shutdown might cap the upside for the USD. The US government shutdown has entered its sixth week and is poised to become the longest in US history. It has delayed key economic data releases, including US Nonfarm Payrolls (NFP), adding to the uncertainty surrounding the economic picture.  

On the JPY’s front, uncertainty surrounding the timing of the next rate hike by the Bank of Japan (BoJ) could weigh on the JPY. Even though BoJ Governor Kazuo Ueda last week signaled that a rate hike was possible as soon as December, markets remained underwhelmed by the central bank's gradual approach. Traders expect Japan's new Prime Minister Sanae Takaichi to pursue aggressive fiscal spending plans and resist policy tightening.