Japanese Yen weakens as softer PMI data adds to BoJ rate hike uncertainty

• The Japanese Yen drifts lower in reaction to disappointing Japan Manufacturing PMI.
• The emergence of some USD buying further contributes to the USD/JPY pair's modest intraday rise.
• The divergent BoJ-Fed policy expectations should help limit further losses for the lower-yielding JPY.

The Japanese Yen (JPY) edges lower during the Asian session after a private survey showed this Wednesday that manufacturing sector activity in Japan fell at the fastest pace in six months in September. The disappointing data comes amid concerns about economic headwinds stemming from US tariffs, which, along with domestic political uncertainty, might give the Bank of Japan (BoJ) more reasons to delay raising interest rates further. Apart from this, the emergence of some US Dollar (USD) buying assists the USD/JPY pair in gaining some positive traction and snapping a two-day losing streak.

Meanwhile, there were two board members voting against the BoJ's decision last week to keep interest rates unchanged, which underscores mounting pressure within the central bank to phase out its massive monetary stimulus. In contrast, the US Federal Reserve (Fed) signaled that two more rate cuts will follow through the rest of this year after lowering borrowing costs for the first time since December last week. The latter could act as a headwind for the USD, and the divergent BoJ-Fed policy outlooks could help limit losses for the lower-yielding JPY, warranting some caution for the USD/JPY bulls.

Japanese Yen is pressured by BoJ rate-hike uncertainty; bulls not ready to give up yet

• The S&P Global flash Japan Manufacturing Purchasing Managers' Index (PMI) declined from 49.7 in August to 48.4 in September,  or the steepest decline since March. This also marked the 14th month of contraction in the past 15 and exerts some downward pressure on the Japanese Yen during the Asian session on Wednesday.
• Furthermore, a Liberal Democratic Party (LDP) leadership election will take place on 4 October, and the outcome could delay the next interest rate hike by the Bank of Japan if a candidate with dovish views is selected. The BoJ, however, signaled that rate hikes remain on the table if the economy and prices move in line with forecasts.
• Moreover, investors are still pricing in the possibility of a 25-basis-point rate hike by the BoJ in October amid signs of economic resilience. This contrasts with the US Federal Reserve (Fed) dovish pivot, which reinforces policy divergence and, in turn, should help limit any meaningful depreciating move for the lower-yielding JPY.
• The US Dollar attracts some buyers and, for now, seems to have stalled a two-day pullback from an over one-week top touched on Monday in the wake of Fed Chair Jerome Powell's remarks on Tuesday. Powell said that policymakers faced a challenging situation in deciding whether to prioritise fighting inflation or protecting jobs.
• Powell added that easing too aggressively could leave the inflation job unfinished and need to reverse course. The comments pushed back against market expectations of more interest rate cuts in the coming months, which revived the USD demand and assisted the USD/JPY pair to gain some positive traction after a two-day downtick.
• Traders now look to the release of New Home Sales from the US for some impetus later during the North American session. The focus, however, remains glued to other important US macro data scheduled during the latter part of the week, including the final GDP print and the Personal Consumption Expenditure (PCE) Price Index.
• Apart from this, traders this week will also confront the release of Tokyo Consumer Price Index (CPI) on Friday, which could influence BoJ rate hike expectations and drive the JPY. Nevertheless, the fundamental backdrop favors the JPY bulls and warrants caution before positioning for any meaningful USD/JPY appreciation.

USD/JPY might struggle to build on the intraday rise beyond the 148.00 mark

The USD/JPY pair, barring a few knee-jerk moves in either direction, has been trading in a familiar range since early August. This constitutes the formation of a rectangle, indicating a consolidation phase. Moreover, mostly neutral oscillators on the daily chart warrant caution before positioning for a firm near-term direction. Spot prices, meanwhile, remain below the 200-day Simple Moving Average (SMA), and the lack of meaningful buying beyond the 148.00 mark suggests that the path of least resistance for the pair is to the downside.

Hence, any subsequent move up is likely to confront an immediate hurdle near the 148.00 round figure. This is followed by the 148.35-148.40 region, or a two-week high touched on Monday, and the 200-day (SMA), around the 148.55 area. A sustained strength beyond the latter has the potential to lift the USD/JPY pair to the 149.00 mark en route to the monthly high, around the 149.15 area.

On the flip side, weakness below the Asian session low, around mid-147.00s, 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 the USD/JPY pair could accelerate the decline 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, which was touched last Wednesday.