Japanese Yen struggles below 159.00 vs USD amid fiscal woes, US-Japan rate gap

The USD/JPY currency pair has climbed back above the 159.00 mark and is now near the upper end of its daily trading range. This comes after a dip earlier in the day and is part of a recent solid recovery from the lowest level since early May. Japan's fiscal year 2026 budget, announced by Prime Minister Sanae Takaichi, is set to be a record ¥122.3 trillion.

This budget, combined with the wide interest rate gap between Japan and other major economies like the US, continues to exert downward pressure on the Japanese Yen. Meanwhile, a modest US Dollar strength is adding to the tailwinds supporting the USD/JPY pair. The US Nonfarm Payrolls (NFP) report, released on Friday, showed disappointing results, but the market's reaction has been short-lived.

Traders are now eagerly awaiting the release of the latest US inflation figures, including the Consumer Price Index (CPI) and Producer Price Index (PPI), on Wednesday and Thursday respectively. These releases are seen as crucial for gauging the future direction of the Federal Reserve's monetary policy. Additionally, developments in the Middle East crisis will also influence USD demand.

However, traders may hold off on making aggressive directional bets until they have more clarity on the Federal Reserve's future policy path. The technical analysis indicates that the USD/JPY pair currently has a bullish near-term tone, with the 38.2% Fibonacci retracement acting as immediate resistance at 159.62. A clear break above this level could open the way for further gains towards the 61.8% retracement at 160.66.

On the downside, support is expected at the 38.2% retracement level at 158.58, followed by the 23.6% level at 157.29, before a deeper pullback could potentially find a floor near 155.21.