Yen Rises as Lower US Yields Drag USD/JPY Off Peak

Key Moments

Yen Gains as USD/JPY Extends Retreat

The USD/JPY pair continued to edge lower in Asian trading on Thursday, building on the previous session’s reversal from the 159.00 region, which had marked a three-week high. Selling pressure carried the exchange rate down to a one-week low near 157.60 in the latest dealings, with several fundamental drivers working against the Dollar and in favor of the Yen.

Market participants remained on alert for potential action by Japanese authorities to support the domestic currency, a factor helping to cap upside attempts in USD/JPY. At the same time, the Bank of Japan’s gradual shift away from ultra-loose policy has provided an additional underpinning for the Yen after the central bank raised its policy rate to 1.25% in September, described as a 31-year high.

Reinforcing this stance, BoJ board member Junko Koeda stated that the central bank should adjust the policy rate in a timely manner based on economic and price developments, taking into account the estimated neutral rate range. This guidance has helped bolster sentiment toward the Japanese Yen (JPY).

Dollar Softens Despite Hotter U.S. CPI

The U.S. Dollar (USD) lost momentum even after a stronger-than-expected U.S. Consumer Price Index (CPI) reading on Wednesday. The initial reaction to the inflation data faded as expectations solidified that the Federal Reserve would refrain from raising rates in October.

Those expectations contributed to an additional pullback in U.S. bond yields, encouraging further profit-taking in the Dollar and intensifying downward pressure on USD/JPY. The decline in yields reduced the relative appeal of the Greenback, particularly against a Yen supported by both policy normalization signals and intervention concerns.

Even so, market pricing continued to reflect more than an 85% probability that the Fed would lift borrowing costs by the end of the year. Inflation risks related to swings in energy prices have kept the door open to further tightening. Geopolitical uncertainties were also seen as potential supports for the Dollar, helping to limit the extent of its losses.

On the Japanese side, reports suggested that BoJ policymakers were leaning against implementing another consecutive rate hike at the October meeting. Such a stance could restrain additional Yen strength and provide some underlying support for the USD/JPY pair even as near-term momentum shifted lower.

Key Data and Fed Communication in Focus

Attention turned to the upcoming release of the U.S. Producer Price Index (PPI) later in the day, which investors viewed as the next potential catalyst for volatility in the Dollar. In addition, market participants looked ahead to a speech by Fed Chair Kevin Warsh on Friday for more insight into the central bank’s policy path.

Both the PPI data and Warsh’s remarks were expected to be important inputs for shaping near-term expectations for U.S. interest rates. Those expectations, in turn, are likely to remain a key driver of short-term price action in the USD and the USD/JPY exchange rate.

Technical Picture: USD/JPY on the Back Foot

On the 4-hour chart, USD/JPY has broken below the pivotal support offered by the 100-period Simple Moving Average (SMA). Sellers are now watching for a sustained move under the 23.6% Fibonacci retracement level before adding to short positions.

If that confirmation occurs, the decline could extend toward the 38.2% retracement at 156.71. Further weakness would put the 50.0% level at 155.98 and the 61.8% retracement at 155.25 in view. Below there, the 78.6% retracement at 154.21 and the 100.0% Fibonacci projection at 152.88 represent deeper structural support zones.

On the upside, initial resistance now lies at the 100-period SMA at 157.97. If buyers manage to regain control above that area, the recent swing high at 159.07 is seen as a more significant barrier.