The Japanese Yen is getting stronger compared to the weaker US Dollar, hitting a two-week high during the European session. This rise comes as people expect the Bank of Japan may raise interest rates in October. Furthermore, rising geopolitical tensions and a US government shutdown make the Yen a more attractive safe haven.

Overview of US and Japanese Economic Data

The possibility that the Bank of Japan will take a tougher stance on interest rates contrasts with predictions that the US Federal Reserve will cut borrowing costs twice this year. As a result, the USD/JPY pair has dropped to a one-week low near 147.00. Important US economic reports, like the ADP employment report and ISM Manufacturing PMI, may influence the direction of this pair. In September, Japan’s Manufacturing PMI hit 48.5, marking the fastest decline in six months. However, the Tankan business survey indicates a slight improvement in Japanese manufacturers’ outlook. An expected 25-basis-point interest rate hike by the BoJ in October is supportive for the Yen. The US is experiencing a partial government shutdown, which may negatively impact the economy. The FedWatch Tool shows a higher chance of rate cuts from the Fed. In August, US job openings were reported at 7.22 million. If the government stays shut, essential economic reports, like the Nonfarm Payrolls, may be postponed. Right now, the split between central banks is crucial for our analysis. The Bank of Japan seems poised to raise interest rates, with overnight index swaps suggesting an 85% chance of a hike at the meeting on October 28. This approach contrasts sharply with the Federal Reserve, where markets expect rate cuts.

Impact of the US Government Shutdown

In the US, the ongoing government shutdown is increasing expectations of a more dovish Fed. The previous shutdown from 2018 to 2019 lasted 35 days and reduced quarterly GDP by about 0.2%, a concern for the Fed. The CME FedWatch tool shows a 70% chance of a rate cut this month, increasing to over 90% by December. This divergence in policies is narrowing the interest rate gap between the US and Japan, which is the main driver for USD/JPY. We previously saw this play out when the interest rate gap widened in 2022-2023, pushing the pair above 150. With the gap now shrinking, we can expect continued downward pressure on this currency pair. Today’s ADP employment report is significant, with expectations set at only 50,000 jobs—well below the first half of 2025’s average of 180,000. If the number aligns with or drops below this estimate, it would strengthen the view of a slowing US economy and likely push USD/JPY below 147.00. We might want to consider strategies that take advantage of this trend, such as buying puts on USD/JPY or shorting futures contracts. From a technical perspective, we are closely watching the 147.00 level. If it breaks below this point consistently, it will confirm a bearish trend and could lead to further declines. On the other hand, we should keep an eye on the 200-day moving average, which is currently around 148.40, for any unexpected changes in market sentiment. Create your live VT Markets account and start trading now.

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