Japanese Yen bulls seem hesitant amid fiscal woes, wide US-Japan rate gap

The USD/JPY pair holds steady below the 160.00 psychological mark during the Asian session on Tuesday and remains close to a one-month peak, which was retested the previous day.

Anxiety over Japan's massive national debt burden, surging long-term borrowing costs, and expansionary fiscal policies continue to undermine confidence in the Japanese Yen (JPY). Furthermore, the persistently wide interest rate gap between Japan and other major economies, including the US, keeps JPY bulls on the back foot, which, in turn, acts as a tailwind for the USD/JPY currency pair.

The US Dollar (USD), on the other hand, attracts fresh buyers following the previous day's pullback from an over two-week top amid hawkish US Federal Reserve (Fed) expectations and escalating US-Iran tensions. Traders ramped up bets for a rate hike by the US central bank in September following Fed Chair Kevin Warsh's comments at the Jackson Hole Symposium on Friday.

In fact, Warsh acknowledged that inflation is running hot and hinted on Friday that interest rates could need to move higher if more progress isn’t made on easing price pressures. Adding to this, inflation fears stemming from higher energy prices back the Fed's tightening bias, which, along with geopolitical uncertainties, continue to lend some support to the safe-haven Greenback.

In the latest developments surrounding the Middle East crisis, US forces struck two rocket launchers on Iran’s Larak Island in the Strait of Hormuz on Sunday, prompting an Iranian counterattack on American air bases in Jordan. US President Donald Trump threatened more strikes on Iran after the first exchange of direct attacks in a month, supporting crude oil prices and the USD.

The aforementioned fundamental backdrop seems tilted in favor of bulls, though fears of another joint intervention by Tokyo and Washington cap the upside for the USD/JPY pair. Traders now look to this week's important US macro releases, starting with the ISM Manufacturing PMI later today. The focus, however, will be on the US Nonfarm Payrolls (NFP) report on Friday.

USD/JPY 4-hour chart

Technical Analysis

The USD/JPY pair holds in a neutral near-term stance as it consolidates above the 100-period Simple Moving Average (SMA) at 159.19 on the 4-hour chart, which hints at an underlying bid. Spot prices, however, remain capped by the 200-period SMA at 160.26, keeping upside attempts in check while the pair fluctuates around the 50.0% Fibonacci retracement at 159.59.

Immediate resistance above the 200-period SMA is located at the 61.8% Fibo. at 160.62, while higher barriers emerge at 162.09 and 163.96. On the downside, initial support aligns with the 50.0% retracement at 159.59 and the 100-period SMA at 159.19, ahead of deeper Fibonacci supports at 158.56 and 157.28, with the broader structural floor seen near 155.21.