Japanese Yen Consolidates Around 159.00 Vs USD As Bearish Potential Remains Intact

The USD/JPY pair is seen oscillating in a narrow band just above the 159.00 mark during the Asian session on Tuesday, awaiting a fresh catalyst before the next leg of a directional move. Meanwhile, the fundamental backdrop seems tilted in favor of bulls and suggests that the path of least resistance for spot prices is to the upside.

The Japanese Yen (JPY) might continue with its relative underperformance amid worries over Japan's worsening fiscal condition due to surging long-term interest rates, a massive national debt burden, and expansionary budget pressures. Moreover, interest rates in Japan remain significantly lower than those in other major economies, which keeps the so-called JPY carry trade active. These, to a large extent, have offset the effect of a joint US-Japan currency intervention in late July and might continue to act as a tailwind for the USD/JPY pair.

Meanwhile, Treasury Secretary Scott Bessent announced Monday that the US is launching a campaign to isolate Iran from the global economy and warned that any country conducting business with Iran risks facing US sanctions. Iran's Supreme National Security Council secretary, Mohsen Rezaei, has already warned that the Islamic Republic would halt all oil exports through the Strait of Hormuz and anywhere else in the Persian Gulf if economic war continues. This keeps the war-risk premium in play and supports the US Dollar (USD).

Furthermore, inflation risks stemming from volatile oil prices underpin prospects for at least one interest rate hike by the US Federal Reserve (Fed) and act as a tailwind for the Greenback. Traders, however, seem hesitant to place aggressive bullish bets on the USD amid diminishing odds for an immediate Fed policy tightening. Adding to this, the US  Treasury's bond market intervention failure revives fiscal sustainability concerns, which, in turn, are seen acting as a headwind for the buck and the USD/JPY, warranting some caution.

The market focus remains on the release of the US Personal Consumption Expenditures (PCE) Price Index on Wednesday. Adding to this, Fed Chair Kevin Warsh's speech at the Jackson Hole Symposium will be scrutinized closely for more cues about the future policy path. The outlook, in turn, will play a key role in influencing the near-term USD price dynamics and provide some meaningful impetus to the USD/JPY pair.

USD/JPY 4-hour chart

Technical Analysis

The USD/JPY pair holds a mild bullish bias above the 100-period Simple Moving Average (SMA) on the 4-hour chart and the 38.2% Fibonacci retracement of the corrective decline from a four-decade high. Further up, resistance is seen at the 50.0% retracement at 159.59, followed by the 61.8% retracement at 160.62, with higher barriers at 162.09 and 163.96.

On the downside, initial support comes from the 100-period SMA at 158.67 and the nearby 38.2% retracement at 158.56, with a deeper floor at the 23.6% level around 157.28, where buyers would be expected to re-emerge if the current consolidation unwinds.