USD/JPY Price Forecast: Bears not ready to give up despite Japan’s political turmoil

The USD/JPY pair opened with a bullish gap at the start of a new trading week in reaction to Japanese Prime Minister Shigeru Ishiba's resignation over the weekend. This adds a layer of uncertainty, which could temporarily hinder the Bank of Japan (BoJ) from normalising policy and exert some downward pressure on the Japanese Yen (JPY). Apart from this, a generally positive tone around the equity markets turned out to be another factor that undermined the JPY's safe-haven status and provided a modest lift to the currency pair.

The initial market reaction, however, turns out to be short-lived amid hawkish BoJ expectations. The bets were reaffirmed by an upward revision of Japan's Q2 GDP growth figures, which showed that the economy expanded at an annualised 2.2% rate in the April-June period from the previous quarter, much faster than the initial reading of 1.0%. On a quarterly basis, GDP grew 0.5% compared to a median forecast and the estimate of a 0.3% increase. This comes on top of a rise in Japan's household spending and positive real wages for the first time in seven months, which keeps hopes alive for an imminent BoJ rate hike by the year-end and helps limit deeper JPY losses.

The US Dollar (USD), on the other hand, struggles to capitalize on its modest intraday uptick amid speculations about a more aggressive policy easing by the US Federal Reserve (Fed). In fact, traders started pricing in a small possibility of a jumbo interest rate cut later this month following the disappointing release of the US monthly employment details on Friday. The popularly known US Nonfarm Payrolls (NFP) report showed that the economy added just 22K jobs in August. Moreover, revisions to earlier prints revealed the economy lost 13K jobs in June, marking the first monthly decline since December 2020 and pointing to a softening US labor market.

Additional details revealed that the US Unemployment Rate edged higher to 4.3% from 4.2% in July, as anticipated, while the Labor Force Participation Rate ticked up to 62.3% from 62.2%. Finally, annual wage inflation, as measured by the change in the Average Hourly Earnings, declined to the 3.7% YoY rate from the 3.9% previous. Investors were quick to react and now expect the Fed to lower borrowing costs three times by the end of this year. This keeps the US Treasury bond yields depressed and the USD close to its lowest level since July 28, touched on Friday, which contributes to capping the USD/JPY pair and attracts fresh sellers near a technically significant 200-day SMA.

This, along with the divergent BoJ-Fed policy expectations, suggests that the path of least resistance for spot prices is to the downside in the absence of relevant market-moving US economic data on Monday. The market focus now shifts to the release of the latest US inflation figures – the Producer Price Index (PPI) and the Consumer Price Index (CPI) on Wednesday and Thursday, respectively. The crucial data should provide a fresh impetus to the USD and determine the near-term trajectory for the USD/JPY pair.

USD/JPY daily chart

Technical Outlook

The intraday failure near the very important 200-day SMA barrier, currently pegged near the 148.75 region, and a subsequent slide below the 148.00 mark favor the USD/JPY bears. However, slightly positive oscillators on the daily chart warrant some caution before positioning for deeper losses. Hence, any further decline is more likely to attract dip-buyers near the 147.45-147.40 region, which, in turn, should limit the downside for spot near the 147.00 mark. Some follow-through selling below the 146.80-146.70 strong horizontal support would shift the near-term bias in favor of bearish traders and expose the August swing low, around the 146.20 region, before spot prices eventually drop to the 146.00 mark.

On the flip side, the Asian session high, around the 148.55-148.60 region, now seems to act as an immediate hurdle ahead of the 200-day SMA. This is closely followed by the 149.00 round figure and the 149.20 area, or a one-month high touched last week. The latter represents the 61.8% Fibonacci retracement level of the decline from the August swing high, which, if cleared, might shift the near-term bias in favor of the USD/JPY bulls. Spot prices might then aim to reclaim the 150.00 psychological mark and extend the momentum further towards challenging the August monthly swing high, around the 151.00 neighborhood.