Japanese Yen sticks to strong gains amid intervention fears, Fed-BoJ divergence

The Japanese Yen (JPY) sticks to its strong intraday gains heading into the European session on Tuesday amid speculations that government authorities might intervene to stem a further decline in the domestic currency. This, along with some repositioning trade ahead of the crucial Federal Reserve (Fed) and the Bank of Japan (BoJ) rate decisions this week, assists the JPY to recover sharply from an over two-week high touched against its American counterpart the previous day.

Meanwhile, data released on Monday showed that Japan’s service-sector inflation rose for the second consecutive month in September and reinforced bets for gradual rate hikes by the BoJ. This marks a significant divergence in comparison to dovish Federal Reserve (Fed) expectations, which keeps the US Dollar (USD) depressed and benefits the lower-yielding JPY. That said, expectations of aggressive fiscal spending under Japan's new Prime Minister Sanae Takaichi might cap the JPY.

Japanese Yen bulls retain control as comments from Economic Minister spark intervention fears

• Japan's Economics Minister Minoru Kiuchi said this Tuesday that it is important for foreign exchange (FX) moves to be stable and reflect fundamentals, adding that he will scrutinize its impact on Japan’s economy.
• Japan's Prime Minister Sanae Takaichi said that she wants to realise a new golden age of the Japan-US alliance. Moreover, US President Donald Trump said that we are signing a new deal with Japan, and it is a fair deal.
• Data released on Monday showed that Japan's Services Producer Price Index accelerated to 3.0% in September, reaffirming bets for further tightening by the Bank of Japan and also lending support to the Japanese Yen.
• This marks a significant divergence in comparison to the growing market acceptance that the US Federal Reserve will lower borrowing costs by 25-basis-points at the end of a two-day policy meeting on Wednesday.
• Moreover, traders have been pricing in a greater possibility of another rate reduction by the US central bank in December. This keeps the US Dollar bulls on the defensive and further exerts pressure on the USD/JPY pair.
• Meanwhile, Takaichi is known for her pro-stimulus stance and could resist early tightening by the BoJ. Hence, the BoJ policy update on Thursday will be looked at for guidance about a rate hike in December or early next year.
• Trump said ahead of his expected meeting with Chinese leader Xi Jinping that the US and China were poised to come away with a trade deal. Trump added that he could sign a final deal on TikTok as early as Thursday.
• The optimism remains supportive of the upbeat market mood and might contribute to capping any meaningful appreciating move for the safe-haven JPY, which, in turn, should help limit losses for the USD/JPY pair.

USD/JPY could extend the corrective decline further towards challenging the 151.00 round figure

A failure near the monthly swing high, around the 153.25-153.30 region, and the subsequent fall warrant some caution for the USD/JPY bulls. However, positive oscillators on the daily chart back the case for the emergence of some dip-buyers near the 152.00 round figure. A convincing break below the latter could negate the positive outlook and pave the way for deeper losses towards the 151.10-151.00 zone with some intermediate support near the 151.50-151.45 area.

On the flip side, the 152.90-153.00 region now seems to act as an immediate hurdle ahead of the 153.25-153.30 zone, above which the USD/JPY pair could aim towards reclaiming the 154.00 round figure. The momentum could extend further towards the next relevant resistance near mid-154.00s en route to the 154.75-154.80 region and the 155.00 psychological mark.