USD/JPY retreats as Greenback weakens on trade tensions, Fed easing bets and US fiscal gridlock

• USD/JPY extends decline for a second day as the Greenback weakens amid renewed US-China trade tensions.
• Prolonged US government shutdown and rising expectations of Fed rate cuts weigh on sentiment.
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The Japanese Yen (JPY) trades on the front foot against the US Dollar (USD) on Wednesday, with USD/JPY extending losses for a second straight day as the Greenback weakens under pressure from escalating US-China trade tensions and a dovish Federal Reserve (Fed) outlook.

At the time of writing, USD/JPY is trading around 151.30, down nearly 0.35% on the day and retreating from last week's eight-month high near 153.27.

Trade tensions between the United States (US) and China continue to dominate market sentiment this week after flaring up late Friday, when President Donald Trump unsettled investors by announcing plans to impose 100% tariffs on all Chinese imports effective November 1. The move came in response to Beijing's decision to tighten export restrictions on rare-earth elements.

In the latest escalation, President Donald Trump accused China of deliberately reducing soybean purchases from American farmers and said Washington is considering ending certain trade arrangements, including those involving cooking oil and related goods.

Adding to the Dollar's woes, the prolonged US government shutdown continues to sap investor confidence. The Senate is scheduled to vote later on Wednesday for the ninth time on a House-approved short-term spending bill aimed at reopening federal agencies, after once again rejecting a Republican proposal on Tuesday night.

On the monetary policy front, markets remain convinced that the Fed is likely to deliver additional interest rate cuts before year-end. According to the CME FedWatch Tool, traders are pricing in a 97% probability of another 25 basis-point rate cut at the October 29-30 meeting, followed by a 95% chance of a similar move in December. The growing conviction of back-to-back cuts reflects expectations that the Fed will prioritize supporting a weakening labor market, even as inflation remains above the 2% target.

Meanwhile, in Japan, political uncertainty is deepening after the ruling coalition collapsed, leaving the Liberal Democratic Party's new leader, Sanae Takaichi, struggling to secure parliamentary approval to become Prime Minister. The LDP has proposed a vote on a new prime minister on October 21. However, opposition parties haven't agreed to that date, leaving the outlook uncertain.