USD/JPY Price Forecast: Traders lack conviction as Takaichi is set to be Japan’s first female PM

The USD/JPY pair struggles to capitalize on its modest intraday gains beyond the 151.00 mark as traders assess Japan's political landscape before positioning for the next leg of a directional move. The Japanese Yen (JPY) weakened at the start of a new week after the ruling Liberal Democratic Party(LDP) and the Japan Innovation Party (JIP) confirmed an alliance. A parliamentary vote for Sanae Takaichi to be Japan's first female Prime Minister is set for Tuesday. This, in turn, fueled speculations about more fiscal stimulus and its potential impact on the Bank of Japan's (BoJ) monetary policy.

Takaichi supports the former Premier Shinzo Abe's economic policies, which advocated for big spending and loose monetary policy to support the Japanese economy. This, in turn, reaffirmed market expectations that the BoJ could further delay raising interest rates. However, the fragile new coalition, still a minority, would need cooperation from other opposition groups to pass any legislation. This, in turn, keeps a lid on the so-called "Takaichi trade" and helps limit deeper JPY losses, which, along with a modest US Dollar (USD) downtick, caps any meaningful upside for the USD/JPY pair.

Meanwhile, inflation in Japan has stayed at or above the BoJ’s 2% target for more than three years, and the economy expanded for a fifth straight quarter in the three months through June. Moreover, BoJ Deputy Governor Shinichi Uchida reiterated on Friday that the central bank will continue raising rates if economic and price developments move in line with its forecasts. This marks a significant divergence in comparison to the growing acceptance that the US Federal Reserve (Fed) will cut interest rates two more times this year. The latter acts as a headwind for the USD and the USD/JPY pair.

Apart from dovish Fed expectations, concerns that the economic risks stemming from a prolonged US government shutdown fail to assist the USD to build on Friday's modest recovery gains. In fact, the federal government shutdown has now stretched into its 20th day, with Republicans locked in a standoff with Democrats over health care subsidies. The Senate is preparing for its 11th vote on the stopgap funding bill later this Monday amid the still unresolved impasse. This, in turn, favors the USD bears and warrants some caution before positioning for any further appreciating move for the USD/JPY pair.

On the trade-related front, US President Donald Trump said on Friday that a full-scale tariff on China would be unsustainable and also confirmed a meeting with his Chinese counterpart. As the October FOMC policy meeting looms, Fed officials have entered a blackout period, leaving the USD at the mercy of trade developments. Moreover, the market focus will remain glued to the release of the latest US consumer inflation figures on Friday. The crucial data will play a key role in influencing the near-term USD price dynamics and providing some meaningful impetus to the USD/JPY pair.

USD/JPY 1-hour chart

Technical Outlook

The intraday move up struggles to find acceptance above the 100-hour Simple Moving Average (SMA) and falters ahead of the 50% retracement level of the recent decline from the monthly peak. However, positive oscillators on 1-hour/daily charts suggest that any subsequent slide could be seen as a buying opportunity near the 150.25 zone, or the 23.6% Fibo. retracement level. This is followed by the 150.00 psychological mark, which, if broken, could make the USD/JPY pair vulnerable to test the 149.40-149.35 area, or a nearly two-week low touched on Friday, and slide to the 149.00 mark. The slide could extend further towards the 148.45-148.40 strong horizontal resistance-turned-support.

On the flip side, momentum back above the 38.2% Fibo. retracement level, nearing the 151.00 mark, could face some resistance near the 151.30-151.35 region, or the 50% retracement level. Some follow-through buying could lift the USD/JPY pair to the 151.75 confluence – comprising the 61.8% Fibo. retracement level and the 200-hour SMA. A sustained strength beyond the latter should allow spot prices to surpass the 152.00 mark and climb towards the next relevant hurdle near the 152.25 supply zone en route to the 153.00 mark.