Japanese Yen surrenders modest intraday gains amid domestic political uncertainty

• The Japanese Yen struggles to capitalize on the modest bullish gap opening on Monday.
• The outcome of Japan’s upper house election and trade uncertainties undermine the JPY.
• Diminishing odds for an immediate BoJ rate hike contribute to the JPY intraday pullback.

The Japanese Yen (JPY) attracts fresh sellers following a modest bullish gap opening at the start of a new week amid the domestic political uncertainty. Japan’s upper house election on Sunday dealt a big blow to the ruling coalition and raised concerns about an increase in debt, amid calls from the opposition to boost spending and cut taxes. The outcome could further complicate trade negotiations with the US amid the looming tariff deadline on August 1. Apart from this, the slowing economic growth, declining real wages, and signs of cooling inflation could allow the Bank of Japan (BoJ) to forgo raising interest rates in the near term, which, in turn, continues to undermine the JPY.

The aforementioned fundamental backdrop suggests that the JPY is more likely to continue with its relative underperformance witnessed since the beginning of this month. However, persistent uncertainties about US President Donald Trump’s erratic trade policies could underpin the JPY’s safe-haven status. Moreover, subdued US Dollar (USD) price action, amid mixed signals about the Federal Reserve’s (Fed) rate-cut path, could act as a headwind for the USD/JPY pair and contribute to capping any further gains. Nevertheless, the fundamental backdrop seems tilted firmly in favor of the JPY bears and suggests that the path of least resistance for the pair is to the upside.

Japanese Yen bulls remain on the sidelines after Japan’s upper house election outcome

• Japan’s ruling coalition – the Liberal Democratic Party (LDP) and its junior partner Komeito – failed to secure a majority in the country’s upper house in the tightly-contested election on Sunday. Having already lost its majority in Japan’s more powerful lower house last October, the defeat will undermine the coalition’s influence.
• This raises the risk of policy paralysis amid a tricky time when Japan is struggling to strike a trade deal with the US ahead of the August 1 deadline for US President Donald Trump’s reciprocal tariffs. Japan faces a punishing 25% levy on all exports to the US amid stalled negotiations over the latter’s protection of its rice market.
• Moreover, history suggests that domestic political uncertainty tends to keep the Bank of Japan on the sidelines. Hence, the prospect of rate hikes is now set to be delayed for a little bit longer, at least until the end of October. This, in turn, undermines the Japanese Yen and assists the USD/JPY pair to attract some dip-buying.
• The US Dollar remains on the back foot below the monthly peak in the wake of Federal Reserve Governor Christopher Waller’s dovish comments last week, backing the case for a rate cut in July. Investors, however, seem convinced that the US central bank will keep rates elevated for a longer period amid inflationary concerns.
• The latest US inflation figures released last week indicated that the Trump administration’s increasing import taxes are passing through to consumer prices. Traders seem convinced that the Fed will wait at least until September before pulling the trigger and are pricing in the possibility of a 50 basis points rate cut by the year-end.
• Japanese markets are closed on Monday in observance of Marine Day. Moreover, there isn’t any relevant market-moving data due for release from the US, leaving the USD/JPY pair at the mercy of the USD price dynamics. Later this week, traders will take cues from the flash global PMIs, which could influence the safe-haven JPY.

USD/JPY seems poised to appreciate further; sustained strength above 149.00 awaited

From a technical perspective, the USD/JPY pair once again showed some resilience below the 100-hour Exponential Moving Average (EMA). However, the recent failure to find acceptance above the 149.00 mark warrants some caution for bulls. Hence, it will be prudent to wait for some follow-through buying beyond the 149.15-149.20 region, or a multi-month peak, before positioning for any further gains. Given that oscillators on the daily chart are holding comfortably in positive territory, spot prices might then aim to reclaim the 150.00 psychological mark.

On the flip side, any corrective pullback might continue to find some support near the 148.00 mark, or the Asian session low. This is followed by the 147.70-147.65 area, or the 100-hour SMA, which, if broken, could drag the USD/JPY pair to sub-147.00 levels. Acceptance below the latter might shift the bias in favor of bearish trades and pave the way for a fall towards the 146.60 intermediate support en route to the 146.20 area, the 146.00 mark, and the 100-day SMA, currently pegged near the 145.80 region.