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The Japanese Yen (JPY) extends the previous day's retracement slide from a two-week top touched against a broadly recovering US Dollar (USD) and attracts some follow-through selling during the Asian session on Friday. Government data showed earlier today that the Unemployment Rate in Japan rose more than expected, to 2.6% in August. This, along with a positive risk tone and domestic political uncertainty, turns out to be a key factor undermining the safe-haven JPY.

Any meaningful JPY depreciation, however, seems elusive in the wake of the growing acceptance that the Bank of Japan (BoJ) will stick to its policy normalization path and hike interest rates in October. This marks a significant divergence in comparison to bets that the US Federal Reserve (Fed) will lower borrowing costs two more times by the year-end. The resultant narrowing US-Japan rate differential should benefit the lower-yielding JPY and keep a lid on the USD/JPY pair.

Japanese Yen weakens amid receding safe-haven demand, domestic political uncertainty
 

• Government data showed this Friday that Japan's Unemployment Rate rose to 2.6% in August, compared to 2.3% in the previous month and consensus estimates for a reading of 2.4%.
• This comes ahead of the Liberal Democratic Party leadership election on Saturday, October 4th, and undermines the Japanese Yen during the Asian session amid the positive risk tone.
• The new Prime Minister will influence the trajectory of Japan's fiscal policy, which could further determine the Bank of Japan's policy stance and drive demand for the JPY in the near term.
• Traders have largely priced in Koizumi's victory. If Takaichi wins, it becomes a positive surprise, and the stock market could surge, said Kazuaki Shimada, Chief Strategist at IwaiCosmo Securities.
• Asian markets tracked Wall Street's another session of record highs on Wednesday amid expectations that the US government shutdown would have a limited impact on the economy.
• US Treasury Secretary Scott Bessent warned that the shutdown could hurt the economy more than those in the past, with potential hits to the GDP, growth, and the labor market.
• Bank of Japan Governor Kazuo Ueda said that the central bank must maintain an accommodative monetary environment to offset various uncertainties in Japan’s economic outlook.
• Ueda, however, reiterated that the BoJ will raise interest rates if the economy and prices move in line with forecasts, keeping hopes alive for an imminent rate hike later this month.
• In contrast, traders have fully priced in a rate cut by the Federal Reserve in October and see around a 90% probability of another rate reduction at the December FOMC meeting.
• Dallas Fed President Lorie Logan noted that inflation is running above target and that payroll gains have declined markedly. Logan sees risks on both sides of the Fed's mandate.
• The US Dollar struggles to build on the overnight bounce from a one-week low and might cap the USD/JPY pair, which seems poised to end the week on a downbeat note.
• Important US macro data scheduled at the beginning of a new month, including the Nonfarm Payrolls (NFP) report, could be delayed amid the US government shutdown.

USD/JPY seems vulnerable while below 200-day SMA resistance near 148.25
 

The USD/JPY pair has been showing resilience below the 147.00 mark and bounced off the 100-day Simple Moving Average (SMA) support near the 146.60-146.55 region for the second straight day on Thursday. The subsequent move up favors bullish traders. That said, oscillators on the daily chart have just started gaining negative traction, which, in turn, backs the case for the emergence of some selling near the 148.00 mark.

This is followed by a technically significant 200-day SMA, around the 148.35 zone, which, if cleared, might trigger a short-covering move. The USD/JPY pair might then climb to the 149.00 mark en route to the 149.35-149.40 region before making a fresh attempt to conquer the 150.00 psychological mark.

On the flip side, the 147.00 mark could protect the immediate downside ahead of the 146.60-146.55 pivotal support. Some follow-through selling has the potential to drag the USD/JPY pair to the 146.00 mark. The downward trajectory could extend further towards the September swing low, around the 145.50-145.45 region, en route to the 145.00 psychological mark.

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