Japanese Yen sticks to intraday gains near two-week top against a weaker USD

• The Japanese Yen outperforms the USD as a deal with the US eases economic worries.
• The JPY bulls shrug off domestic political uncertainty and disappointing PMIs.
• The USD hangs near multi-week trough and also exerts pressure on USD/JPY.

The Japanese Yen (JPY) sticks to positive bias through the Asian session, which, along with a broadly weaker US Dollar (USD), keeps the USD/JPY pair depressed near the 146.00 mark, or an over two-week low touched earlier this Thursday. The recently announced Japan-US trade deal reduces economic uncertainty and raises the likelihood that the Bank of Japan (BoJ) will resume its tightening cycle later this year. This, in turn, is seen as a key factor underpinning the JPY.

The JPY bulls, meanwhile, seem rather unaffected by the domestic political uncertainty and the disappointing release of the flash Manufacturing PMI from Japan. Even the prevalent risk-on environment does little to dent the intraday bullish sentiment surrounding the safe-haven JPY. The USD, on the other hand, languishes near its lowest level in over two weeks amid the uncertainty over the Federal Reserve’s rate-cut path, which, in turn, favors the USD/JPY bears.

Japanese Yen continues to be underpinned by trade optimism

• Japan’s trade deal with the US has removed a key downside risk for the domestic economy, suggesting that conditions for the Bank of Japan to hike interest rates further may start to fall in place. In fact, BoJ Deputy Governor Shinichi Uchida reiterated on Wednesday the central bank’s course of action to continue raising interest rates if the economy and prices move in line with forecasts.
• Moreover, a Reuters poll showed that a majority of economists expect the BoJ to hike its key interest rate again by the year-end, though most expect the central bank could wait for some time and would stand pat at this month’s meeting. Nevertheless, reviving BoJ rate hike bets continues to underpin the Japanese Yen and drags the USD/JPY pair below the 146.00 mark on Thursday.
• Meanwhile, Japan’s ruling coalition – the Liberal Democratic Party (LDP) and its junior partner Komeito – suffered a defeat in the upper house elections last weekend. This adds a layer of uncertainty and fuels concerns about Japan’s fiscal health. Adding to this, a private-sector survey showed on Thursday that Japan’s manufacturing activity unexpectedly slipped into contraction during July.
• In fact, the S&P Global Japan manufacturing Purchasing Managers’ Index (PMI) dropped to 48.8 from June’s final reading of 50.1 as businesses assessed the impact of US tariffs. This, to a larger extent, overshadows the upbeat gauge for the services sector, which increases to 53.5 in July from 51.7 in the previous month. Apart from this, the upbeat market mood could cap the safe-haven JPY.
• The US Dollar struggles to attract any buyers amid fears that the Federal Reserve’s independence could be under threat from mounting political interference. US President Donald Trump has been personally attacking Fed Chair Jerome Powell for not lowering interest rates. US Treasury Secretary Scott Bessent said that the new Fed Chair nominee is likely to be announced in December or January.
• Thursday’s US economic docket – featuring the usual Weekly Initial Jobless Claims, the flash PMIs, and New Home Sales – might influence the USD price dynamics later during the North American session. Furthermore, the European Central Bank decision could infuse some volatility in the markets, which would drive the safe-haven demand and provide some impetus to the USD/JPY pair.

USD/JPY seems vulnerable; break below 100-SMA on H4 in play

From a technical perspective, an intraday breakdown below the 100-period Simple Moving Average (SMA) and the 146.00 mark could be seen as a key trigger for the USD/JPY bears. Moreover, oscillators on the daily chart have just started gaining negative traction and back the case for a further depreciating move. Some follow-through selling below the 145.75 area (July 10 low) will reaffirm the outlook and drag spot prices to the 145.20-145.15 region, or the 61.8% Fibonacci retracement level of the upswing in July, en route to the 145.00 psychological mark.

On the flip side, the 100-period SMA support breakpoint, currently pegged near the 146.60 area, which now coincides with the 38.2% Fibo. retracement level, should now act as an immediate strong barrier. A sustained strength beyond could lift the USD/JPY pair to the 147.00 round figure. This is closely followed by the overnight swing high, around the 147.20 area, which, if cleared, could allow spot prices to accelerate the move up towards the 147.60-147.65 intermediate hurdle en route to the 148.00 round figure.