USD/JPY Facing Critical Juncture: Factors Impacting the Japanese Yen

The USD/JPY exchange rate is currently trading near 149.98, experiencing a slight increase. Notably, during the Asian session, the pair briefly exceeded the 150 mark, although this occurred during a period of low trading activity.

The recent depreciation of the yen can be primarily attributed to the widening interest rate gap between the US and Japan. US Treasury 10-year yields have surpassed 5.0%, while their Japanese counterparts remain at 0.87%.

Despite this significant interest rate gap, the Bank of Japan (BoJ) has chosen to maintain its ultra-loose monetary policy. BoJ Governor Ueda has reassured that the bank will continue its policy "patiently," acknowledging the highly uncertain economic outlook.

The upcoming BoJ meeting, scheduled for October 30-31, adds an element of uncertainty to the yen's path. While no changes to policy settings are expected, traders are advised to remain vigilant. Historically, the BoJ has made unexpected policy adjustments, resulting in substantial yen volatility. The Bank will also release new quarterly growth and inflation forecasts, offering critical insights into the yen's future direction.

The prevailing question centers on expectations for a BoJ policy shift. There is a growing sentiment that the BoJ might consider policy adjustments in 2024, potentially starting with modifications in yield curve control, followed by a potential rate increase later in the year.

Additionally, Japan is set to release Purchasing Managers' Index (PMI) reports for both the manufacturing and services sectors. The manufacturing sector has faced challenges, experiencing four consecutive months of contraction due to declining exports and weak global demand. The October manufacturing PMI is expected to be around 49.0, showing improvement from September's 48.5. On the contrary, the services sector has been more resilient, with a September reading of 53.8, indicating 13 consecutive months of growth. However, growth in the services sector is anticipated to soften in October, with a market consensus of 52.9.

Technical Analysis and Key Levels

From a technical analysis perspective, the USD/JPY faces critical levels, with resistance at 150.49 and 150.99. Weak support levels can be identified at 149.67 and 149.35. Throughout this week, the pair has displayed consistent upward momentum, and traders are closely monitoring for a significant breakthrough if USD/JPY manages to surpass the 150.000 resistance level.