USD/JPY Price Forecast: Not out of the woods yet; 100-day SMA holds the key for bulls

The USD/JPY pair builds on the previous day's recovery from the 100-day Simple Moving Average (SMA) support, around the 146.60-146.55 region, or a two-week low, and gains positive traction for the second consecutive day on Friday. The momentum, however, stalls near the 147.80 zone during the first half of the European session amid mixed cues, which warrants some caution before positioning for any further appreciating move.

US Treasury Secretary Scott Bessent warned on Wednesday that the government shutdown could hurt the economy more than those in the past, with potential hits to the GDP, growth, and the labor market. Traders, however, brushed aside worries amid expectations of a limited impact on the economic performance. The optimism led to another session of record highs on Wall Street, which undermines the safe-haven Japanese Yen (JPY).

Meanwhile, government data released earlier today showed that Japan's Unemployment Rate rose to 2.6% in August, compared to 2.3% in the previous month and consensus estimates for a reading of 2.4%. This, along with domestic political uncertainty, contributes to the selling bias surrounding the JPY and the USD/JPY pair's move higher. In fact, Japan's Liberal Democratic Party (LDP) leadership election will be held on Saturday, October 4th.

The new Prime Minister will influence the trajectory of Japan's fiscal policy, which could further determine the Bank of Japan's (BoJ) policy stance and drive demand for the JPY in the near term. In fact, the outcome could delay the next interest rate hike by the BoJ if a candidate with dovish views is selected. This adds a layer of uncertainty amid concerns about economic headwinds stemming from US President Donald Trump's 15% baseline tariffs.

Adding to this, BoJ Governor Kazuo Ueda said that the central bank must maintain an accommodative monetary environment to offset various uncertainties in Japan’s economic outlook. Ueda, however, reiterated that the BoJ will raise interest rates if the economy and prices move in line with forecasts. This keeps hopes alive for an imminent BoJ rate hike later this month, which, in turn, limits deeper JPY losses and keeps a lid on the upside for the USD/JPY pair.

The US Dollar (USD), on the other hand, struggles to capitalize on the overnight bounce from a one-week low amid the growing acceptance that the US Federal Reserve (Fed) will lower borrowing costs two more times by the end of this year. This marks a significant divergence in comparison to the BoJ's hawkish outlook. The resultant narrowing of the US-Japan rate differential further benefits the lower-yielding JPY and warrants some caution for USD/JPY bulls.

Important US macro releases scheduled at the beginning of a new month, including the Nonfarm Payrolls (NFP) report, could be delayed amid the US government shutdown. That said, speeches from influential FOMC members could provide some impetus to the buck and the USD/JPY pair, which remains on track to register heavy losses for the first time in three weeks. Moreover, the fundamental backdrop backs the case for a further depreciating move.

USD/JPY daily chart

Technical Outlook

The USD/JPY pair bounced off the 100-day SMA near mid-146.00s for the second consecutive day on Thursday. The subsequent move up, however, falters ahead of the 148.00 mark, which is closely followed by the 200-day SMA, around the 148.15-148.20 region. A sustained strength beyond the latter might trigger a short-covering move and lift spot prices to the 149.00 mark. Some follow-through buying, leading to a further strength beyond the 149.35-149.40 region, should allow bulls to make a fresh attempt towards conquering the 150.00 psychological mark.

On the flip side, weakness back below the 147.00 round figure might continue to find decent support in the vicinity of the 146.50 region. A convincing break below could make the USD/JPY pair vulnerable to weaken further below the 146.00 mark, towards the September swing low, around the 145.50-145.45 region. The downward trajectory might eventually drag spot prices to the 145.00 psychological mark.