Japanese Yen moves away from two-week low touched against USD on Monday

• The Japanese Yen edges higher against a mildly softer USD for the second straight day.
• The divergent BoJ-Fed policy expectations offer some support to the lower-yielding JPY.
• Domestic political uncertainty and a positive risk tone could cap the safe-haven JPY.

The Japanese Yen (JPY) remains on the front foot against its American counterpart during the Asian session on Tuesday and looks to build on the previous day's recovery move from a two-week trough. Hawkish dissents to the Bank of Japan's (BoJ) on-hold decision last week could be a prelude to impending rate hikes, which turns out to be a key factor offering some support to the JPY. The US Dollar (USD), on the other hand, struggles to attract buyers amid rising bets for at least two more rate cuts by the Federal Reserve (Fed). This marks a significant divergence in comparison to a relatively hawkish BoJ, which might continue to benefit the lower-yielding JPY.

Meanwhile, investors remain concerned that domestic political uncertainty and economic headwinds stemming from US tariffs could give the BoJ more reasons to further delay an increase in borrowing costs. This might hold back the JPY bulls from placing aggressive bets. Furthermore, the prevalent risk-on mood – as depicted by a generally positive tone around the equity markets – could contribute to capping the safe-haven JPY. Nevertheless, the fundamental backdrop seems tilted in favor of the JPY bulls and suggests that the path of least resistance for the USD/JPY pair is to the downside as traders await Fed Chair Jerome Powell's speech later today.

Japanese Yen bulls have the upper hand amid firming BoJ rate hike expectations

• A Liberal Democratic Party (LDP) leadership election will take place on 4 October, and the outcome could affect the likely timing of the next rate hike by the Bank of Japan if a candidate with dovish views is selected.
• Shinjiro Koizumi, seen as a frontrunner in the ruling party's leadership race, said that the government must be mindful of the need for fiscal discipline, but achieving solid economic growth is the basis for guiding sound fiscal policy.
• Separately, Japan's Prime Minister contender, Yoshimasa Hayashi, said that the government must avoid issuing deficit-covering bonds to fund spending. Furthermore, Sanae Takaichi noted that the government should be mindful of the risk of causing yield rise in guiding fiscal policy.
• Wall Street indices have hit a series of record highs since last week, and the spillover effect leads to a further rise in Asian stocks. This, in turn, keeps a lid on the safe-haven Japanese Yen during the Asian session on Tuesday.
• There were two dissents to the BoJ's decision to leave the interest rate unchanged at 0.5%. Moreover, BoJ Governor Kazuo Ueda showed readiness to hike rates further if the economy and prices moved in line with forecasts.
• Investors are now pricing a greater chance of a 25 basis point BoJ rate hike in October amid signs of economic resilience. This marks a significant divergence in comparison to the Federal Reserve's dovish outlook.
• The US central bank lowered borrowing costs last Wednesday for the first time since December and signaled that more interest rate cuts would follow through by the year-end amid signs of a softening labor market.
• Traders now believe that interest rates will drop much faster than the Fed is planning and are betting on the possibility that the short-term rate, currently in the 4.00%-4.25% range, will fall under 3% by the end of 2026.
• NATO countries have accused Russia of violating the airspace of alliance members Estonia, Poland, and Romania. Russia, however, rejected the claims and accused the European powers of levying baseless accusations.
• Despite recent diplomatic efforts to find ways to end the more than three-year war, fighting has intensified in recent months. In fact, Russia and Ukraine accused each other of deadly drone strikes on civilian areas on Monday.
• Hamas escalated its attacks and launched multiple rockets on Israel amid the intensifying attacks by the Israeli Defense Forces inside Gaza City. This keeps geopolitical risks in play and could benefit the safe-haven JPY.
• Traders now look forward to Fed Chair Jerome Powell's scheduled speech later during the North American session, which will influence the USD price dynamics and provide some meaningful impetus to the USD/JPY pair.
• In the meantime, the flash PMIs could offer some insight into the global economic health, which, in turn, would play a key role in driving the broader risk sentiment and demand for the traditional safe-haven JPY.
• The focus, however, would be on two key inflation figures from Japan's capital city, Tokyo, and the US Personal Consumption Expenditure (PCE) Price Index, due for release during the latter part of the week, on Friday.

USD/JPY could accelerate the downfall below the post-BoJ swing low, around 147.20

The USD/JPY pair could find some support near last Friday's post-BoJ swing low, around the 147.20 zone. This is followed by the 147.00 mark, below which spot prices could accelerate the fall towards the 146.20 horizontal support. The downward trajectory could extend further towards the 145.50-145.45 region, or the lowest level since July 7, touched last Wednesday.

On the flip side, the 148.00 round figure could act as an immediate hurdle ahead of the 148.35-148.40 region, or a two-week high touched on Monday, and the very important 200-day Simple Moving Average (SMA), around the 148.55 area. Some follow-through buying could lift the USD/JPY pair to the 149.00 mark en route to the monthly high, around the 149.15 area.