USD/JPY Analysis: Bulls seem non-committed amid intervention fears; US ADP and ISM PMI eyed

The USD/JPY pair regains some positive traction on Wednesday following the previous day's dramatic turnaround from levels beyond the 150.00 psychological mark, or a fresh YTD peak and a subsequent bounce from its lowest level since September 14. Spot prices stick to modest intraday gains and hold steady above the 149.00 round figure heading into the European session, though the uptick lacks bullish conviction in the wake of jawboning by Japanese authorities to defend the domestic currency. In fact, Japan's Finance Minister Shunichi Suzuki repeated that currency rates must move stably reflecting fundamentals and said that the government remains ready to take necessary action against excess volatility, without ruling out any options.

Suzuki, however, refrained from disclosing whether they had stepped into the market to prop up the Japanese Yen (JPY), and so did Japan's top currency diplomat Masato Kanda. Speaking to reporters earlier today, Kanda said that he met Prime Minister Fumio Kishida to discuss the economy in general and that any intervention would target volatility rather than JPY levels. Nevertheless, market participants remain sceptical that Japan will intervene in the FX market to combat a sustained depreciation in the JPY. This, along with the prevalent risk-off environment, could benefit the JPY's relative safe-haven status and hold back traders from placing fresh bullish bets around the USD/JPY pair, though a bullish US Dollar (USD) might continue to act as a tailwind.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, stands tall near its 11-month peak and remains well supported by the Federal Reserve's (Fed) hawkish outlook. Market participants seem convinced that the Fed will continue to tighten its monetary policy. Moreover, the recent comments by several Fed officials backed the case for at least one more 25 bps rate hike by the end of this year to bring inflation back to the 2% target. Adding to this, the monthly JOLTS report released on Tuesday showed that there were an estimated 9.61 million open jobs in August, marking a sizeable uptick from the upwardly revised print of 8.92 million in July. This points to a still-tight labour market and brings wage inflation back on the agenda.

Persistently high inflation, in turn, might force the Fed to keep rates higher for longer and possibly extend the rate-hiking cycle into 2024. The repricing of the Fed's policy outlook, meanwhile, leads to an extended selloff in the US fixed-income market, pushing the yield on the benchmark 10-year government bond to a fresh 16-year peak and underpinning the USD. Moreover, a further rise in the US bond yields results in the widening of the US-Japan rate differential and should contribute to driving flows away from the JPY, suggesting that the path of least resistance for the USD/JPY pair is to the upside. Traders now look to the US macro data – the ADP report and ISM Services PMI – for a fresh impetus later during the early North American session.

Technical Outlook

From a technical perspective, the USD/JPY pair, for now, has managed to defend the 200-hour Simple Moving Average (SMA). The said support, around the 149.10-149.00 area, is likely to protect the immediate downside ahead of the 148.70 zone. The next relevant support is pegged near the 148.50-148.45 region, which if broken decisively might prompt some technical selling and pave the way for deeper losses. Spot prices might then accelerate the slide further towards the 148.00 mark before eventually dropping back to the overnight swing low, around the 147.30 region.

On the flip side, the 149.60 area is likely to act as an immediate hurdle, above which the USD/JPY pair could climb back to the 150.00 psychological mark, or the intervention level, which should act as a key pivotal point for short-term traders. A sustained strength and acceptance beyond the said handle will confirm a fresh breakout, paving the way for an extension of the recent well-established uptrend witnessed over the past two months or so. The subsequent move up has the potential to lift spot prices further towards the 151.00 round figure en route to the 152.00 neighbourhood, or a multi-decade higher touched in October 2022.