USD/JPY maintains a favourable position close to 158.35 during the early hours of Wednesday’s Asian session. Members of the Bank of Japan’s board are seeking additional time to assess the effects of the recent interest rate increases on domestic financial conditions. Expectations for an additional Federal Reserve rate hike this month have diminished following the release of weaker US jobs data for September. The USD/JPY pair exhibits resilience, advancing to approximately 158.35 in the early hours of Asian trading on Wednesday. Receding expectations for a rate hike by the Bank of Japan exert downward pressure on the Japanese Yen against the US Dollar. Traders will pay close attention to the Minutes of the Federal Open Market Committee later on Wednesday. BoJ Governor Kazuo Ueda stated on Tuesday that the central bank would “assess the likelihood and risks of the baseline economic and price outlook being realised” when evaluating the pace and timing of future rate hikes. The market perceives that the Japanese central bank is likely to adopt a cautious approach regarding a rate increase during its October monetary policy meeting, which is exerting downward pressure on the JPY. The Bank of Japan’s new policymaker Ayano Sato expressed her support for the concept of incrementally raising interest rates, as reported by source on Tuesday. Pricing in overnight index swaps indicates that markets assign approximately a 12% probability to a rate hike this month, a decrease from the 40% observed early last week, according to source.
The current probability has surged to approximately 90% when factoring in the December meeting. On the US front, traders have diminished their expectations for a Federal Reserve rate hike this month in light of the softer-than-anticipated jobs data. The US Nonfarm Payrolls experienced an increase of 29K in September, a notable decline from the 133K rise recorded in August, as reported by the US Bureau of Labour Statistics on Friday. This figure came in below the market consensus of 90K. The Unemployment Rate increased to 4.2% in September, up from 4.1% in August. Analysts note that, following the “as expected 25 bps rate rise last month,” market pricing now “suggests only a limited prospect of a policy move at the October 30 meeting, with expectations centring on December for the next policy move.” Even though BoJ Governor Kazuo Ueda reiterated this morning that policymakers intend to “continue raising the policy interest rate” and described the Japanese economy as growing “moderately,” Rabobank argues that “this strengthens the market’s expectation that back-to-back rate hikes BoJ are unlikely.” As they put it, “even so, the Bank is still not widely viewed as being in a position in which back-to-back rate rises are appropriate,” although “this may suggest that a hastened pace of rate hikes is possible, though clearly that depends on how the economy develops in the months ahead.”
On the external side, Rabobank’s house view is that “the market has anticipated too much Fed policy tightening next year.” They contend that, “assuming some Fed rate hike risk is priced out, USD/JPY has the potential to move lower into 2027,” but for now “we maintain a 3-month USD/JPY target of 155.00.” While USD/JPY has moved higher since the September policy meeting, Rabobank highlights that “the market is fearful that a return to levels close to 160, could again trigger further intervention.” Against this backdrop, they judge that the BoJ’s inflation objective “now appears to have reached the point when it can instead shift its focus to stabilising price pressures around the target level,” reinforcing expectations for a measured, rather than aggressive, tightening path. Fed’s Schmid delivers a distinctly hawkish tone, with an 8/10 FXS Speechtracker score modestly above the 7.5/10 historical average, underscoring a firmer stance relative to the established baseline. The emphasis that inflation is “frustrating,” that the Fed “still has a way to go,” and that AI is now “one of the largest drivers of inflation” highlights concern about persistent price pressures and emerging structural forces, while the assertion that Fed credibility is at stake and that “the Fed still has work to do on the short rate despite higher long-term yields” signals a willingness to maintain or even tighten policy despite the bond market backdrop.
The FXS Fed Sentiment Index increased by 0.34 points to 137.91, indicating that the overarching policy stance continues to be decisively hawkish, significantly exceeding the neutral threshold of 100. This incremental uptick, aligned with the stronger-than-baseline speech score, suggests that Fed communication continues to support a resilient Dollar bias as markets price in a prolonged restrictive stance. In the daily chart, USD/JPY is currently constrained in the short term, as the 100-day simple moving average and the upper Bollinger Band create a ceiling that limits recovery efforts. Price remains above the middle Bollinger Band, with the 14-day Relative Strength Index at 56.27 indicating moderately constructive momentum that has not yet surpassed the prevailing bearish structural bias established by the dominant longer-term average. On the topside, initial resistance is situated at the 100-day SMA at 159.55, followed by the upper Bollinger Band in proximity to 159.80. On the downside, immediate support is positioned at the middle Bollinger Band at 156.90, with a more substantial cushion at the lower Bollinger Band near 154.00, should selling pressure reemerge beneath the recent pivot at 158.38.
