AUD/JPY Advances as Yen Weakness Supports Upside Bias

Key Moments

Fundamental Drivers: Yen Under Pressure

AUD/JPY is firm around 113.40 in early European trading on Tuesday, with the cross supported by broad weakness in the Japanese Yen against the Australian Dollar. Concerns over Japan’s fiscal trajectory and ongoing inflation pressures are weighing on the Yen, while market participants look ahead to Australian labor market figures due on Thursday.

Market attention is centered on Prime Minister Sanae Takaichi’s proposal to temporarily cut the consumption tax on food to 1% for a two-year period. The plan has unsettled investors because no replacement revenue stream has been identified, and the measure is perceived as an inefficient tool to address inflation. At the same time, persistently high energy prices are adding strain to Japan’s oil-reliant economy, further undermining support for the Yen.

BoJ Rate Expectations Reshape the Yen Narrative

Despite current Yen weakness, expectations are building that the Bank of Japan may move toward tighter policy at its next meeting in September. A report on Friday from Reuters indicated that the central bank is considering a rate hike as early as September. Pricing in overnight index swaps now assigns roughly an 80% probability to such a move by that month.

Policy Repricing: Views from the Market

DBS strategist Philip Wee highlights a sharp repricing in relative policy expectations, noting that “market odds of a September Bank of Japan rate hike have surged to 81% from 21%, while expectations for a Fed hike have plummeted to 32% from 72%.” He argues that JPY bears may be underestimating the implications of this swing in market-implied probabilities, especially against the backdrop of a more supportive stance on higher interest rates from Prime Minister Sanae Takaichi, who is under growing domestic pressure to stabilize the Yen.

Technical Picture: Uptrend Structure Intact

On the daily time frame, AUD/JPY continues to display a constructive short-term profile. Price action remains above the 100-day simple moving average and the middle band of the Bollinger Bands, indicating a solid demand zone beneath the market. The 14-day Relative Strength Index stands at 57.55, comfortably above the neutral line and pointing to positive momentum without signaling overbought conditions.

On the downside, initial technical support is positioned at the 100-day simple moving average near 113.00. Below that, the next area of interest comes in around the Bollinger Bands’ middle line near 112.65, followed by a more significant contention zone near the lower band at approximately 110.00.

On the upside, the first resistance level to monitor is the July 16 peak at 113.88. A move through that region would bring the July 27 high at 114.67 into focus. Beyond that, the upper Bollinger band near 115.25 marks a key technical barrier; a daily close above this level would signal scope for the prevailing uptrend to extend further.