- The Japanese yen weakens following disappointing PMI results from Japan.
- A slight rise in the USD further boosts the USD/JPY pair during the day.
The Japanese Yen (JPY) continues its steady decline against the US dollar (USD) during the Asian session on Wednesday, pushing the USD/JPY pair to around 148.00. A recent survey revealed that manufacturing activity in Japan dropped significantly in September, marking its steepest decline in six months. This downturn is raising concerns about domestic political instability and economic challenges from US tariffs, which could lead the Bank of Japan (BOJ) to postpone any interest rate increases.
Recently, two BOJ board members opposed the decision to keep interest rates unchanged, highlighting the increasing pressure on the central bank to start unwinding its extensive financial support. This tension suggests a growing divide, as there’s speculation about additional rate cuts throughout the year, contrasting with the more cautious stance of the US Federal Reserve. Additionally, rising geopolitical tensions may help cushion the yen’s losses.
Yen faces challenges amid softer manufacturing data
- The S&P Global Flash Japan Manufacturing Purchasing Managers’ Index (PMI) fell from 49.7 in August to 48.4 in September, representing the sharpest decline since March. This marks a downturn during a period of overall contraction for Japan, putting added pressure on the yen in this Asian trading session.
- Furthermore, the election for leadership within the ruling Liberal Democratic Party (LDP) is slated for October 4th. The outcome could postpone the BOJ’s next interest rate hike, particularly if a candidate favoring a dovish stance is elected. However, the BOJ indicates that if economic and price forecasts proceed as expected, there may still be scope for a rate hike.
- Investors are pricing in a potential 25 basis point rate increase by the BOJ this October, bolstered by indicators of economic resilience. This contrasts with the dovish pivot from the Federal Reserve, which may help strengthen the differences in monetary policy and, subsequently, limit significant depreciation in the yen.
- The USD is seeing some buying interest and has managed to stabilize after a two-day pullback from earlier highs this week, which followed comments from Fed Chairman Jerome Powell. Powell acknowledged the complexity facing policymakers as they balance the fight against inflation and job protection.
- He mentioned that being too aggressive could leave inflation issues unresolved, implying that policy might need to revert. His remarks challenged market expectations for more interest rate cuts in the near future, bolstering demand for the USD and supporting the USD/JPY pair after two days of declines.
- Traders are now looking ahead to the release of new home sales data from the US, hoping it will provide some momentum later in the North American trading session. Yet, attention also remains on critical US macro data coming later in the week, including final GDP numbers and the Personal Consumption Expenditures (PCE) price index.
- Additionally, the Tokyo Consumer Price Index (CPI) set to release on Friday could impact BOJ rate forecasts and influence movement in the yen. Nevertheless, the broader backdrop suggests a supportive environment for yen bulls, and caution should be exercised when considering positions favoring significant appreciation against the USD.
USD/JPY may draw fresh sellers; 200-day SMA appears vulnerable
The USD/JPY pair has remained within a familiar range since early August, apart from a few brief fluctuations. This creates a rectangular pattern and points to a phase of consolidation. Notably, the neutral oscillator on the daily chart indicates a strong short-term orientation. However, trading below the 200-day simple moving average (SMA) and weak buying above the 148.00 level suggests a downward path may be more likely.
Thus, any further movements could encounter immediate resistance near the 148.00 mark, followed by the 148.35-148.40 range, and around the 148.55 level of the 200-day SMA. A sustained breakthrough beyond this could propel the USD/JPY pair toward the 149.00 level, potentially reaching monthly highs near 149.15.
On the flip side, a drop below the mid-147.00s from earlier in the Asian session—around 147.20, which had previously shown some support—could lead to more significant declines. This might hit the psychological barrier of 147.00 and, if breached, could accelerate the decline toward horizontal support around 146.20. The downward trend could extend further, potentially reaching the 145.50-145.45 area, a low not seen since July 7.
