USD/JPY weakens amid softer US Dollar, steady Japanese labor and services data

• USD/JPY edges lower as the Japanese Yen gains traction amid a softer US Dollar.
• Fed's cautious tone and stronger private-sector data temper rate-cut expectations.
• Japanese Yen finds additional support from upbeat Labor Cash Earnings and a stronger Jibun Services PMI.

The Japanese Yen (JPY) trades on the front foot against the US Dollar (USD) on Thursday, as the Greenback weakens following a strong multi-day rally. At the time of writing, USD/JPY is trading around 153.13, down over 0.50% on the day.

The pullback in the Dollar comes as traders grow increasingly uneasy over the prolonged United States (US) government shutdown, which is now the longest in history. The shutdown has delayed the release of key economic data, forcing both markets and the Federal Reserve (Fed) to rely on private-sector indicators.

This data vacuum, coupled with mounting concerns about potential economic disruption, is weighing on the Greenback, prompting a mild technical correction after recent strength.

Overall sentiment still favors the USD as traders reassess the Fed's monetary policy outlook following Chair Jerome Powell's hawkish remarks last week. After a 25-basis-point (bps) rate cut, Powell cautioned that further easing is "not a foregone conclusion," prompting markets to trim expectations for a December cut. Supporting this stance, stronger-than-expected ADP Employment Change and ISM Services Purchasing Managers Index (PMI) data have reinforced the view that the Fed may keep policy on hold through year-end.

Adding to the cautious tone, Fed Chicago President Austan Goolsbee told CNBC on Thursday that "most labor market indicators show stability," with only "mild cooling" and "a little downside risk." He said he "may be reluctant to continue the rate-cutting cycle," though noted the eventual neutral rate is likely to settle "a fair bit below" current levels.

Meanwhile, the Yen drew additional support from encouraging domestic data released earlier in the day. Japan's Labor Cash Earnings rose 1.9% year-on-year in September, matching forecasts and marking an improvement from the previous 1.3% gain. The Jibun Bank Services PMI for October came in at 53.1, beating expectations of 52.4.

The Bank of Japan (BoJ) published the minutes from its latest policy meeting on Wednesday, following last week's decision to keep interest rates at 0.50%. The minutes revealed that most policymakers agreed real interest rates remain "very low," suggesting the central bank is likely to continue normalizing policy at a gradual pace if its economic and inflation projections materialize.