Japanese Yen bulls seem hesitant as USD reverses post-NFP slide amid geopolitical tensions

The USD/JPY pair started the week subdued, failing to capitalize on the modest upward movement from the sub-157.00 levels observed on Friday. Following the weak US employment data, the spot prices have remained within a range of 157.70-157.75, indicating a lack of significant movement. The US Nonfarm Payrolls (NFP) report showed a paltry addition of 29K jobs in September, as opposed to the downwardly revised 133K from the previous month.

Moreover, the Unemployment Rate rose to 4.2%, and wage growth slowed to a 3% year-on-year pace. This, coupled with subdued US PCE data, has diminished the pressure on the Federal Reserve (Fed) to hike interest rates later in the month.

Meanwhile, expectations are mounting that the Bank of Japan (BoJ) may raise interest rates again as early as October, despite potential Japanese Yen (JPY) intervention risks. This combination of factors poses a challenge for the USD/JPY pair, as ABN Amro analysts have assessed the latest US labor market report as consistent with their base case.

They note that the apparent labor market resurgence over the previous reports may have been a mirage, with the 3-month average employment growth of 51K being solid given the labor supply but not indicative of a tight or hot market. Furthermore, the softer employment tone, especially with the negative surprise from the PCE report earlier in the week, has removed the pressure on the Fed to hike interest rates in October.

Despite the US Dollar's current strength, driven by geopolitical uncertainties stemming from the Middle East conflict and the escalating Russia-Ukraine war, the USD/JPY pair maintains a constructive near-term bias. This is because investors remain vigilant for more clues about the Federal Reserve's future policy path, as evident in the FOMC Minutes due on Wednesday.

The Japanese Yen, as one of the world's most traded currencies, is widely influenced by the Bank of Japan's policy decisions and the differential between Japanese and US bond yields, along with risk sentiment among traders. The gradually unwinding of the Bank of Japan's ultra-loose monetary policy since 2013 to 2024 has caused the Yen to depreciate against its major currency counterparts due to a widening policy divergence between the Bank of Japan and other central banks.