USD/JPY firms as Greenback rebounds, US shutdown clouds economic outlook

• The Japanese Yen halts its four-day advance as the US Dollar stages a modest rebound.
• Investor sentiment remains fragile as the US government shutdown drags on and threatens the release of critical US economic data.
• Markets nearly fully price in a 25 bps interest rate cut at the October FOMC meeting.

The Japanese Yen (JPY) halts its four-day winning streak against the US Dollar (USD) on Thursday, with USD/JPY edging higher during the American session. At the time of writing, the pair trades near 147.25, up about 0.12% on the day, as the Greenback attempts a modest rebound after recent weakness.

The Greenback’s rebound looks more technical than fundamental, with short-covering and profit-taking driving the move after its retreat to a one-week low. However, the broader backdrop remains fragile as political gridlock in Washington keeps investor sentiment cautious amid the ongoing US government shutdown.

US President Donald Trump’s economic advisers have warned that a prolonged shutdown could deal a severe blow to growth. According to a White House memo cited by Politico, the US economy risks losing about $15 billion in GDP each week the government remains closed, while a month-long stalemate could push an additional 43,000 people into unemployment.

At the same time, growing expectations of further monetary policy easing by the Federal Reserve (Fed) continue to cap the Dollar’s upside. On Wednesday, weaker-than-expected ADP employment data intensified rate-cut bets, with markets now almost fully pricing in a 25 basis-point (bps)reduction at the October FOMC meeting.

The Fed outlook has grown more complicated as the shutdown threatens to delay key data, with Friday’s Nonfarm Payrolls (NFP) report unlikely to be released, and the September Consumer Price Index (CPI) due on October 15 also at risk.

On the Japanese side, politics may add another layer of uncertainty as the ruling Liberal Democratic Party (LDP) prepares to elect its new leader this weekend, a contest that will effectively determine the country’s next prime minister.

Looking ahead, in the likely absence of Friday’s Nonfarm Payrolls release, traders will keep a close eye on developments surrounding the US government shutdown for direction. On the Japanese side, Friday’s docket features the August Unemployment Rate and the September Jibun Bank Services PMI, while remarks from BoJ Governor Kazuo Ueda could offer fresh policy cues.