USD/JPY Price Forecast: Weekly uptrend remains uninterrupted amid Takaichi's policy beets

The USD/JPY pair prolongs its weekly uptrend for the third consecutive day and climbs to its highest level since February 17 on Wednesday amid a combination of supporting factors. The Japanese Yen (JPY) continues with its relative underperformance in the wake of the recent domestic political development. This, along with some follow-through US Dollar (USD) buying, is seen offering support to the currency pair and contributing to the move higher.

Sanae Takaichi's surprise win in the ruling Liberal Democratic Party's (LDP) leadership race on Saturday fueled expectations for more expansionary fiscal policy, which could complicate the task facing the Bank of Japan (BoJ). Traders were quick to react and started pricing out the possibility of an interest rate cut by the BoJ later this month. Moreover, the swap markets indicate less than a 50% chance of a BoJ rate hike by December, down from 68% last Friday. This has been a key factor behind the heavy selling surrounding the JPY since the beginning of this week and fueling the USD/JPY pair's strong positive momentum.

Meanwhile, 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, two out of the nine BoJ board members voted against keeping the interest rate on hold last month, citing still sticky inflationary pressures. Moreover, Takaichi's economic advisors such as Etsuro Honda and Takuji Aida, were quoted as saying that Japan's incoming first female Prime Minister would probably tolerate another rate hike either in December or January. This, however, fails to provide any respite to the JPY bulls.

The USD, on the other hand, climbs to its highest level since late August and turns out to be another factor acting as a tailwind for the USD/JPY pair. Any further USD appreciation, however, seems capped amid the growing acceptance that the US Federal Reserve (Fed) will lower borrowing costs by 25 basis points (bps) each at October and December policy meetings. This, along with concerns that an extended US government shutdown could affect US economic performance in the face of uncertainties over global trade, might hold back the USD bulls from placing aggressive bets and keep a lid on the USD/JPY pair.

The US government shutdown enters its second week amid few signs of progress toward a deal as Republicans and Democrats remain committed to their positions. Furthermore, any furloughing of federal workers presents risks for the labor market, which, in turn, warrants caution before positioning for any further USD appreciation. Traders now look forward to the release of FOMC Minutes, due later today. Apart from this, Fed Chair Jerome Powell's appearance on Thursday could offer cues about interest rate cuts, which will play a key role in influencing the near-term USD price dynamics and drive the USD/JPY pair.

USD/JPY daily chart

Technical Outlook

This week's breakout through the 151.00 horizontal barrier and a subsequent rally beyond the 152.00 round figure could be seen as a fresh trigger for the USD/JPY bulls. However, the daily Relative Strength Index (RSI) is hovering close to the overbought territory, around the 70 mark, making it prudent to wait for a near-term consolidation or a modest pullback before positioning for further gains.

Any meaningful corrective slide, however, could find decent support near the 152.00 round figure ahead of the Asian session low, around the 151.75 region. A convincing break below the latter could drag the USD/JPY pair to the 151.00 mark. The latter should act as a strong near-term base, which, if broken decisively, could prompt some technical selling and pave the way for deeper losses.

Nevertheless, the USD/JPY pair seems poised to prolong its uptrend towards reclaiming the 153.00 mark en route to the next relevant hurdle near the 153.25-153.30 region. The momentum could extend further towards the 153.70 intermediate hurdle before bulls eventually aim towards conquering the 154.00 mark for the first time since February.