Japanese Yen weakens despite BoJ hike as US Dollar remains firm

The Japanese Yen struggled to gain strength on Friday, as the Bank of Japan (BoJ) increased interest rates by 25 basis points, reaching 1.25% in a move that mirrored market expectations. Meanwhile, the US Dollar (USD) maintained its strength, supported by speculation of further rate hikes from the Federal Reserve (Fed). Despite the BoJ's decision, the Yen's value weakened, potentially defying expectations.

Investors were now focusing on future policy directions rather than the recent rate hike. BoJ Governor Kazuo Ueda indicated that the central bank would continue raising rates if economic or price conditions warranted additional tightening. However, several uncertainties were highlighted, such as geopolitical tensions in the Middle East, AI-related demand fluctuations, and forex market volatility.

Inflation data from Japan also suggested a cautious approach to further rate increases, as the National Consumer Price Index (CPI) remained unchanged in August while underlying inflation was below the BoJ's 2% annual target. Meanwhile, the US Dollar benefited from a more hawkish stance on the Fed's monetary policy outlook, with the Fed raising its benchmark interest rate by 25 basis points to a range of 3.75%-4%.

This move, the first since 2023, came amid rising energy prices that kept inflation risks elevated. Markets currently see a 55% chance of another 25 basis point increase at the October meeting, up from about 40% before the Fed meeting. Higher US yields reinforced the USD's yield advantage over the Yen, contributing to the USD/JPY advance.

The US Dollar Index (DXY) traded above 100.50, nearing its highest level in seven weeks. The combination of a strong US Dollar and the Japanese Yen's disappointing reaction to the BoJ decision kept the USD/JPY at around 157.00. In technical analysis, USD/JPY traded at 156.98, holding above both the 100-hour SMA (155.60) and the 200-hour SMA (154.73), indicating a near-term bullish bias.

The Relative Strength Index (14) eased to around 51, suggesting overbought conditions had eased, leaving room for another upward move if buyers held firm. The next key resistance lies at 158.00, with initial support around 156.98, followed by the 100-hour SMA at 155.60 and the 200-hour SMA at 154.73.