Japanese Yen rallies to two-week top against USD amid trade optimism

• The Japanese Yen outperforms the USD amid US-Japan trade deal optimism.
• The JPY bulls shrug off domestic political uncertainty and disappointing PMI prints.
• The USD languishes near multi-week trough and further exerts pressure on USD/JPY.

The Japanese Yen (JPY) strengthens against its American counterpart for the fourth consecutive day and advances to a nearly three-week peak during the Asian session on Thursday. The recently announced Japan-US trade deal reduces economic uncertainty and raises the likelihood that the Bank of Japan (BoJ) will resume its tightening cycle later this year, which, in turn, is seen as a key factor that continues to underpin the JPY. The US Dollar (USD), on the other hand, languishes near a two-and-a-half-week low and exerts additional pressure on the USD/JPY pair.

However, the domestic political uncertainty and the disappointing release of the flash Japan Manufacturing PMI might hold back the JPY bulls from placing aggressive bets. Furthermore, the upbeat market mood should contribute to capping gains for the safe-haven JPY and limiting further losses for the USD/JPY pair. Traders now look forward to the flash US PMIs to grab short-term opportunities later during the North American session. Nevertheless, the mixed fundamental backdrop warrants caution before placing aggressive directional bets.

Japanese Yen bulls retain control as US-Japan deal eases uncertainty, revives BoJ hike bets

• Japan's trade deal with the US has removed a key downside risk for the domestic economy, suggesting that conditions for the Bank of Japan to hike interest rates further may start to fall in place. In fact, BoJ Deputy Governor Shinichi Uchida reiterated on Wednesday the central bank's course of action to continue raising interest rates if the economy and prices move in line with forecasts.
• Moreover, a Reuters poll showed that a majority of economists expect the BoJ to hike its key interest rate again by the year-end, though most expect the central bank could wait for some time and would stand pat at this month's meeting. Nevertheless, reviving BoJ rate hike bets continues to underpin the Japanese Yen and drags the USD/JPY pair below the 146.00 mark on Thursday.
• Meanwhile, Japan's ruling coalition - the Liberal Democratic Party (LDP) and its junior partner Komeito - suffered a defeat in the upper house elections last weekend. This adds a layer of uncertainty and fuels concerns about Japan's fiscal health. Adding to this, a private-sector survey showed on Thursday that Japan's manufacturing activity unexpectedly slipped into contraction during July.
• In fact, the S&P Global Japan manufacturing Purchasing Managers' Index (PMI) dropped to 48.8 from June's final reading of 50.1 as businesses assessed the impact of US tariffs. This, to a larger extent, overshadows the upbeat gauge for the services sector, which increases to 53.5 in July from 51.7 in the previous month. Apart from this, the upbeat market mood could cap the safe-haven JPY.
• The US Dollar struggles to attract any buyers amid fears that the Federal Reserve's independence could be under threat from mounting political interference. US President Donald Trump has been personally attacking Fed Chair Jerome Powell for not lowering interest rates. US Treasury Secretary Scott Bessent said that the new Fed Chair nominee is likely to be announced in December or January.
• Thursday's US economic docket - featuring the usual Weekly Initial Jobless Claims, the flash PMIs, and New Home Sales - might influence the USD price dynamics later during the North American session. Furthermore, the European Central Bank decision could infuse some volatility in the markets, which would drive the safe-haven demand and provide some impetus to the USD/JPY pair.

USD/JPY could accelerate the decline once 145.75 support is broken

From a technical perspective, an intraday breakdown below the 100-period Simple Moving Average (SMA) and the 146.00 mark could be seen as a key trigger for the USD/JPY bears. Moreover, oscillators on the daily chart have just started gaining negative traction and back the case for a further depreciating move. Some follow-through selling below the 145.75 area (July 10 low) will reaffirm the outlook and drag spot prices to the 145.20-145.15 region, or the 61.8% Fibonacci retracement level of the upswing in July, en route to the 145.00 psychological mark.

On the flip side, the 100-period SMA support breakpoint, currently pegged near the 146.60 area, which now coincides with the 38.2% Fibo. retracement level, should now act as an immediate strong barrier. A sustained strength beyond could lift the USD/JPY pair to the 147.00 round figure. This is closely followed by the overnight swing high, around the 147.20 area, which, if cleared, could allow spot prices to accelerate the move up towards the 147.60-147.65 intermediate hurdle en route to the 148.00 round figure.