The Japanese Yen rebounds supported by expectations of a rate hike by the central bank; the US dollar remains under pressure due to dovish Federal Reserve expectations

Technical Pressure, Policy Support Drives Yen Higher

During Thursday’s Asian trading session, USD/JPY hovered around 155.70, facing clear retracement pressure. After the Asian market opened, the yen unexpectedly gained momentum, breaking the previous downtrend from a one-week high. Market participants generally expect Japanese authorities to intervene to stabilize the currency, coupled with increasing prospects of a rate hike by the Bank of Japan in December. These two factors provide strong support for the yen.

Meanwhile, rising expectations of Fed rate cuts continue to exert downward pressure on the dollar. Increasingly, the market believes the Federal Reserve will initiate a new easing cycle in December. Despite mixed U.S. economic data this week, this outlook remains unchanged, pushing the dollar to a one-week low.

Strong Signals of Policy Intervention, Hawkish Central Bank Reverses Market Expectations

Japanese Finance Minister Satsuki Katayama recently issued the most severe warning to date, declaring that the government will take decisive action against excessive yen depreciation. In response, key decision-maker Takashi Aida also hinted that intervention measures could become a reality, especially considering the negative impact of yen weakness on the economy.

This shift stems from significant policy adjustments. Reuters reported that the Bank of Japan has recently intensified communication, emphasizing the inflation risks associated with persistent yen weakness, implying that there is still considerable room for a rate hike in December. This signal became clearer after a meeting last week between Prime Minister Fumio Kishida and Bank of Japan Governor Kazuo Ueda—suggesting that the new government has likely removed political resistance to the central bank tightening policy.

Official data further supports this outlook. Japan’s October Producer Price Index (PPI) for services rose 2.7% year-over-year, indicating that Japan is close to stabilizing at its 2% inflation target, laying the groundwork for further policy tightening by the central bank.

Fiscal Stimulus and Risk Appetite as Constraints on Yen Appreciation

It is worth noting that last Friday, Japan’s Cabinet approved a ¥21.3 trillion economic stimulus package, the first major policy move by Prime Minister Fumio Kishida’s government and the largest since the pandemic. Concerns over increased debt issuance have become a key driver of the steepening of Japan’s yield curve, which significantly constrains yen bulls.

Currently, market risk appetite remains strong, with limited safe-haven demand. Optimistic expectations for a peace agreement between Russia and Ukraine continue to support market sentiment, further reducing demand for the safe-haven currency yen and limiting its further appreciation potential.

Technical Outlook: 156.70 as Key Support, 158.00 Still Needs to Be Broken

The USD/JPY technical trend requires close attention to the 100-hour simple moving average (SMA), currently around 156.70, which acts as an important support level. If the price successfully breaks above this level, it could regain the 157.00 level, then move toward the intermediate resistance of 157.45-157.50, with the ultimate target at 158.00—last week’s high since mid-January.

On the downside, if the price falls below the overnight low of 155.65, it risks testing the psychological level of 155.00. A confirmed break below 155.00 could lead short-sellers to seek new entries, opening the way for further declines.

Currently, trading volume is relatively light, and market participation is limited, reflecting traders’ tendency to stay on the sidelines amid the U.S. holiday, which may weaken the effectiveness of technical signals.