Japanese Yen remains close to two-week high touched against a weaker USD on Wednesday

• The Japanese Yen continues to draw support from the BoJ's relatively hawkish outlook.
• Fed rate cut bets keep the USD depressed and also exert pressure on the USD/JPY pair.
• A positive risk tone might cap the safe-haven JPY amid domestic political uncertainty.

The Japanese Yen (JPY) turns positive for the fifth straight day against its American counterpart on Thursday and remains close to a two-week high touched the previous day. The growing acceptance that the Bank of Japan (BoJ) will stick to its policy normalization path marks a significant divergence in comparison to bets that the US Federal Reserve (Fed) will lower borrowing costs two more times by the end of this year. The resultant narrowing of the US-Japan rate differential continues to benefit the lower-yielding JPY.

Meanwhile, the market reaction to the US government shutdown, so far, has been muted amid expectations of a limited impact on the economy. This remains supportive of a generally positive risk tone, which, in turn, might keep a lid on the safe-haven JPY. The US Dollar (USD), on the other hand, struggles to capitalize on the overnight bounce from a one-week low amid dovish Fed expectations. This, in turn, attracts fresh sellers around the USD/JPY pair following the Asian session uptick to the 147.25-147.30 region.

Japanese Yen bulls have the upper hand amid divergent BoJ-Fed policy outlooks

• US government agencies began shutting down after President Donald Trump's Republican Party failed to agree with opposition Democrats on a way forward on a spending bill. Investors, however, seem relatively unfazed, as shutdowns have historically had a limited impact on the economic performance.
• Wall Street's three major indices registered gains for the fourth consecutive day, and the spillover effect is evident from a generally positive tone across the Asian equity markets. This turns out to be a key factor undermining the safe-haven Japanese Yen during the Asian session on Thursday.
• The main event risk from Japan this week will be the Liberal Democratic Party leadership election on Saturday, 4th October. The new Prime Minister will influence the trajectory of Japan's fiscal policy, which could further determine the Bank of Japan's policy stance and drive the JPY in the near term.
• Meanwhile, the Summary of Opinions from the September BoJ meeting, released on Tuesday, revealed that board members debated the feasibility of raising interest rates. Moreover, traders are pricing in the possibility of a 25-basis-point BoJ rate hike later this month, which should limit JPY losses.
• In contrast, the CME Group's FedWatch Tool indicates that traders have fully priced in a rate cut by the Federal Reserve in October and see around a 90% probability of another rate reduction in December. The bets were lifted by the disappointing US private-sector employment details.
• Automatic Data Processing reported on Wednesday that private companies shed 32,000 jobs in September, marking the biggest drop since March 2023. Moreover, the August payrolls number was also revised to show a loss of 3,000 compared to an increase of 54,000 reported initially.
• Separately, the Institute for Supply Management's (ISM) Purchasing Managers' Index (PMI) came in slightly above consensus estimates and improved from 48.7 to 49.1 in September. This, however, still pointed to a contraction in the manufacturing business activity for the seventh straight month.
• The immediate effect of a partial US government shutdown is likely to be a delay in key US macro releases, including the usual Weekly Initial Jobless Claims on Thursday and the US Nonfarm Payrolls (NFP) report on Friday. This leaves the US Dollar at the mercy of speeches from FOMC members.

USD/JPY seems vulnerable to retest September swing low, around 145.50-145.45

From a technical perspective, the overnight breakdown below the 147.00 mark could be seen as a key trigger for the USD/JPY bears. Moreover, oscillators on the daily chart have again started gaining negative traction, suggesting that the path of least resistance for spot prices remains to the downside. However, it will still be prudent to wait for some follow-through selling below the 100-day Simple Moving Average (SMA), currently pegged near mid-146.00s, before positioning for further losses. Spot prices might then slide to the 146.00 mark, below which the downward trajectory could extend towards the September swing low, around the 145.50-145.45 region, en route to the 145.00 psychological mark.

On the flip side, the Asian session swing high, around the 147.30 area, now seems to act as an immediate hurdle. Any further move up could be seen as a selling opportunity near the 148.00 mark and remain capped near the 200-day SMA, currently pegged near the 148.35 region. A sustained strength beyond the latter, however, might trigger a short-covering move and lift the USD/JPY pair to the 149.00 round figure. The momentum could extend further towards the 149.35-149.40 region before spot prices make a fresh attempt to conquer the 150.00 psychological mark.