Japanese Yen bulls seem hesitant amid BoJ's dovish rate hike as Fed bets support USD

The USD/JPY currency pair experienced some selling pressure following a minor increase in Asian trading hours to the 157.10 level and a departure from the recent two-week high reached on Friday. The pair is currently hovering around the 156.75 region, with the near-term outlook pointing more towards bullish traders. As anticipated, the Bank of Japan (BoJ) raised the short-term interest rate to a 31-year high during Friday's session and reiterated their commitment to further rate hikes in response to economic, price, and financial condition developments.

However, the tight 7-2 split within the BoJ indicated a divided board, which, combined with Japan's slight easing in inflation for August, dampened expectations for a more aggressive tightening cycle. This, in turn, weakened the Japanese Yen (JPY) and bolstered the USD/JPY pair.

Meanwhile, heightened tensions in the Middle East and the looming possibility of a larger regional conflict have aided the US Dollar (USD) by preventing its retreat from the highest level since late July, which was set on Friday. Latest developments include the Houthis in Yemen attacking key Saudi Arabian locations with both missiles and drones, while Iran simultaneously presented seven conditions for resuming talks with the United States. Geopolitical risks remain a significant factor in the market.

Traders, however, are reluctant to take on overly optimistic bullish positions and are instead waiting to see how the situation in the Middle East unfolds. The focus for this week will be on a vital meeting between US President Donald Trump and Chinese President Xi Jinping on Thursday, which will impact risk sentiment and influence the USD.

The USD/JPY pair is currently trading below the 200-period Simple Moving Average (SMA) on the 4-hour chart at 157.61, with this level and the nearby 200-period SMA acting as strong overhead resistance. A decisive break above this zone could potentially lead to gains towards the 78.6% retracement near 158.75 and the recent swing high at 160.36.

On the downside, immediate support can be found at the 50.0% retracement around 156.60, followed by the 38.2% level near 155.72 and the 23.6% retracement at 154.62. A more substantial pullback may expose the Fibonacci anchor at 152.85.