Japanese Yen Weekly Forecast: USD/JPY Faces Key Test as BoJ, Fed, and Politics Drive Market

USD/JPY Soars: Takaichi’s Victory Triggers a Yen Sell-Off

USD/JPY broke above 150 to hit an eight-month high of 153.274 before retreating below 152. The pair ended the week at 151.128, up 2.49%.

Traders reacted to Sanae Takaichi’s win in the Liberal Democratic Party Leadership race. Takaichi’s support for an ultra-loose monetary policy stance drove bets against an October Bank of Japan rate hike, sending USD/JPY higher. However, news of the LDP-Komeito coalition breakup pushed the pair below 152.

Outlook: Politics, Economic Indicators, and the BoJ Take Center Stage

This week, Japanese politics will take center stage following the breakup of the ruling coalition, fueling uncertainty about Takaichi becoheading a majority coalition government.

Takaichi’s stance on monetary and fiscal policies sent the yen crashing and the Nikkei to a record high last week. Failure to secure a majority could reverse the previous week’s rally. Takaichi may lose the ability to press for ultra-loose monetary policy if Takaichi does not lead a majority government.

However, traders should also closely monitor economic data and Bank of Japan commentary.

With policy and politics colliding, traders face a pivotal week that could set the tone for Q4 volatility in USD/JPY.

Machinery Orders Could Steer BoJ Rate Bets

On Thursday, October 16, machinery orders will provide insights into Japan’s economic momentum. Economists expect machinery orders to rise 0.5% in August after tumbling 4.6% in July.

A higher reading would signal a pickup in business sentiment, potentially boosting wages and job creation. Better-than-expected numbers would support a more hawkish BoJ rate path, raising demand for the yen.

On the other hand, another drop in orders could indicate weaker sentiment. Firms could cut jobs and wages, signaling a more dovish BoJ policy stance if economic indicators flash red, weighing on the yen.

Bank of Japan in the Spotlight as Markets Shift Rate Hike Bets

While machinery orders require consideration, the BoJ’s monetary policy signals will likely have greater influence on the yen. BoJ Governor Kazuo Ueda and policymaker Naoki Tamura are scheduled to speak.

Their views on Takaichi’s LDP election win, the inflation outlook, and the economy could give clues about the timing of an interest rate hike. Given last Friday’s pullback, the USD/JPY pair could face heavy selling pressure if the BoJ hints at a Q4 rate hike. On the other hand, calls to delay a rate hike until 2026 could trigger another USD/JPY breakout.

Bookmark our real-time updates to stay ahead of USD/JPY volatility.

USD/JPY Outlook: Economic Indicators and the BoJ

• Bullish Yen Scenario: Upbeat Japanese data, an LDP gridlock, or hawkish BoJ chatter could drag USD/JPY toward 147.5.
• Bearish Yen Scenario: Weaker data, an LDP majority coalition, or dovish BoJ rhetoric may send the pair toward 155.

Capitol Hill, US Data, and Fed Commentary to Influence the Dollar

The US economic calendar could be bare for a second week after the seventh Senate vote failed to pass a stopgap funding bill. An extended shutdown throughout the next week would leave trade developments, Capitol Hill, and the Fed to drive price trends.

Key events include:

• Fed Chair Powell speech (October 14).

If the US government reopens on October 14

• Retail sales (October 16): Forecast to increase 0.4% MoM in September after rising 0.6% in August.
• Core Producer Prices: (October 16): Expected to rise 2.9% YoY in September, up from 2.8% in August.

Potential releases of delayed reports, including weekly jobless claims and September’s US jobs report, also require consideration. There are three key scenarios for traders to consider this week.

Softer-than-expected US labor market data and cooling inflationary pressures, or further delays to key data, could strengthen expectations of multiple Q4 Fed rate cuts. A more dovish Fed policy stance would temper demand for the US dollar and weigh on the USD/JPY pair.

A sharp rise in unemployment and softer wage growth, combined with rising inflationary pressures, could fuel stagflation jitters. Rising stagflation risks would shift attention to whether the Fed prioritizes labor market support or tightening to tame inflation.

Stronger-than-expected labor market data and rising prices could dampen bets on Fed rate cuts, lifting demand for the US dollar.

Short-term Forecast:

• Bullish US Dollar Scenario: Strong US economic data or hawkish Fed signals may send USD/JPY toward 155.
• Bearish US Dollar Scenario: Weaker US data or dovish Fed rhetoric could push USD/JPY toward 147.5.

USD/JPY Price Action

Daily Chart

On the daily chart, USD/JPY trades above the 50- and 200-day Exponential Moving Averages (EMAs), signaling a bullish bias.

A breakout above 152 could bring the October 10 high of 153.274 into play. A sustained move through 153.274 may enable the bulls to target 155.

On the downside, a drop below 150 could expose the 149.358 support level. If breached, the 50- and 200-day EMAs and 147.5 would be the next key support levels.

Key Takeaway

The USD/JPY pair’s break above 150 underscored the significance of the BoJ’s policy stance on price trends.

This week’s data, political developments in Tokyo, central bank chatter, and US Senate votes could intensify price volatility. Traders should closely monitor developments ahead of the Fed and BoJ October policy decisions.

Consult our economic calendar for historical and upcoming data.