USD/JPY Price Forecast: Seems vulnerable amid geopolitical risks, BoJ-Fed policy divergence

The USD/JPY pair turns lower for the second straight day on Monday and retreats further from a nearly four-week high, around the 146.50 region touched on Friday. The Japanese Yen (JPY) initially weakened on the back of comments from Japan's incoming Prime Minister (PM) Shigeru Ishiba, news that the new PM is planning a general election for October 27 and mixed Japanese macro data. According to The Japan Times, Ishiba stated on Sunday that the Bank of Japan's (BoJ) monetary policy must remain accommodative to underpin a fragile economic recovery. Meanwhile, a government report showed that Japan's Retail Sales rose 2.8% in August from a year earlier as compared to market expectations for an increase of 2.3% and the 2.7% growth registered in the previous month. This, however, was offset by dismal Industrial Production data, which contracted more than anticipated, by 3.3% during the reported month. 

Meanwhile, the People's Bank of China (PBOC) said on Sunday that it would tell banks to lower mortgage rates for existing home loans and provided an additional boost to the already upbeat market mood. This further undermined demand for the safe-haven JPY, though the downside remains limited amid persistent geopolitical risks stemming from the ongoing conflicts in the Middle East. Israel expanded its confrontation with Iran's allies and launched aggressive aerial assaults on Sunday against Houthis in Yemen and Hezbollah in Lebanon. According to a statement by the Israeli Defence Forces dozens of aircraft, including fighter jets, power plants and a seaport at the Ras Issa and Hodeidah ports in Yemen were targeted in the airstrikes. Israeli airstrikes across Lebanon killed the deputy head of the militant group Hezbollah's Central Council, Nabil Kaouk, making him the seventh leader slain in Israeli attacks in a little over a week.

The development fueled concerns that the fighting could spin out of control and trigger an all-out war in the region, which keeps a lid on the latest optimism led by China's stimulus measures. This, along with the divergent BoJ-Federal Reserve (Fed) policy expectations, lends support to the JPY and prompts fresh selling around the USD/JPY pair. Investors seem convinced that the BoJ will hike interest rates again by the end of this year and have been pricing in over a 50% chance of another oversized interest rate cut by the US central bank in November. Meanwhile, dovish Fed expectations keep the USD confined in a nearly two-week-old range, near its lowest level since July 2023 and contribute to the offered tone surrounding the major. Traders now look to the US economic docket, featuring the release of the Chicago PMI, for some impetus ahead of Fed Chair Jerome Powell's speech later during the North American session on this Monday.

Technical Outlook

From a technical perspective, the USD/JPY pair faced rejection near the 50-day Simple Moving Average (SMA) on Friday. The subsequent steep decline and some follow-through selling at the start of a new week favors bearish traders. Moreover, oscillators on the daily chart are holding in negative territory and suggest that the path of least resistance for spot prices is to the downside. Some follow-through selling below the Asian session low, around the 141.65-141.60 region, will reaffirm the bearish outlook and pave the way for a fall towards the 141.00 mark. The downward trajectory could extend further towards the 140.65 intermediate support en route to the 140.00 psychological mark and the 139.60-139.55 area, or the lowest level since July 2023 touched earlier this month.

On the flip side, the Asian session peak, ahead of the 143.00 round figure, might now act as an immediate hurdle, above which a bout of a short-covering could lift the USD/JPY pair to the 143.55-143.60 intermediate resistance en route to the 144.00 mark. A sustained strength beyond the latter should allow bulls to make a fresh attempt to conquer the 145.00 psychological mark and challenge the 50-day SMA, currently pegged near the 145.85-145.90 region. Any further more beyond the 146.00 mark might face stiff resistance near the 146.50 area, or the multi-week high touched on Friday, which if cleared decisively would shift the near-term bias in favor of bullish traders.

USD/JPY daily chart