The Japanese Yen (JPY) trades with a mild positive bias against a broadly weaker US Dollar (USD) during the first half of the European session, though it remains close to a one-year low, touched earlier this Monday. Concerns about further escalation of geopolitical tensions turn out to be a key factor offering some support to the safe-haven JPY. The USD, on the other hand, is pressured by growing worries about the US Federal Reserve’s (Fed) independence and moves away from its highest level since December 5, touched on Friday.
The upside for the JPY, however, remains capped amid reports that Japan’s Prime Minister Sanae Takaichi may call an early general election. This comes on top of a deepening Japan-China rift and the uncertainty over the likely timing of the next rate hike by the Bank of Japan (BoJ), which is holding back the JPY bulls from placing aggressive bets. Hence, it will be prudent to wait for strong follow-through buying before confirming that the JPY has formed a near-term bottom and positioning for any meaningful USD/JPY corrective slide.
Japanese Yen edges higher as safe-haven flows offset BoJ and political uncertainty
- US President Donald Trump told reporters on Sunday that he was considering a range of options, including potential military action, in response to the unrest in Iran. The latter threatened to target US military bases if Trump carries out threats to intervene on behalf of protesters.
- This comes on top of the intensifying Russia-Ukraine war and tempers investors’ appetite for riskier assets, lending some support to the safe-haven Japanese Yen at the start of a new week. However, a combination of factors holds back traders from placing aggressive JPY bullish bets.
- Last week, China prohibited dual-use goods, including some rare earth elements, from being exported to Japan with immediate effect. The ban follows a diplomatic row over Taiwan and heightens supply-chain risk for Japanese manufacturers, which could act as a headwind for the JPY.
- The Yomiuri newspaper reported on Friday that Japan’s Prime Minister Sanae Takaichi was considering holding a snap parliamentary election in the first half of February. Adding to this, the uncertainty over the timing of the next Bank of Japan interest rate hike could cap the JPY.
- The US Dollar, on the other hand, attracts heavy selling amid growing worries about the US Federal Reserve’s independence and moves away from its highest level since December 5, touched on Friday. This further contributes to the USD/JPY pair’s Asian session slide to mid-157.00s.
- Fed Chair Jerome Powell said that the Department of Justice is threatening a criminal indictment against him. Powell added that the threat of criminal charges is a consequence of the Fed, based on its best assessment of what will serve the public, rather than following the preference of the President.
- On the economic data front, the US Bureau of Labor Statistics (BLS) reported on Friday that Nonfarm Payrolls rose by 50K in December, below expectations for a reading of 60K and November’s 56K (revised from 64K). However, the Unemployment Rate fell to 4.4% from 4.6% in November.
- This led to a shift in the likelihood of a Fed rate cut at the next policy meeting on January 28, though it failed to impress the USD bulls. Nevertheless, the Fed is still expected to lower borrowing costs further this year, which marks a significant divergence compared to hawkish BoJ bets.
- In fact, BoJ Governor Kazuo Ueda reiterated last week that the central bank would continue to raise interest rates if economic and price developments move in line with forecasts, leaving the door open for further policy tightening. This, in turn, caps the upside for the USD/JPY pair.
- Traders now look forward to the release of the latest US inflation figures – the Consumer Price Index (CPI) and the Producer Price Index (PPI) on Tuesday and Wednesday, respectively. This would influence the USD price dynamics and provide a fresh impetus to the USD/JPY pair.
USD/JPY might continue to find some support near the 157.50 region
The 200-period Simple Moving Average (SMA) on the 4-hour chart nudges higher at 156.14, with the USD/JPY pair holding above it to preserve a bullish bias. As a slower trend gauge, the rising SMA underscores underlying demand. The Moving Average Convergence Divergence (MACD) line stands above the Signal line and above zero, while the histogram remains positive, suggesting firm upside momentum. The Relative Strength Index (RSI) prints at 75 (overbought), pointing to stretched conditions that could cap immediate gains.
Price remains supported by the rising 200-period SMA, and a sustained hold above that average would keep buyers in control. MACD’s positive alignment reinforces the bullish tone. With RSI above 70, any dip could be a pause to unwind overbought readings before the trend resumes. Failure to maintain the SMA base would open room for a corrective pullback.
(The technical analysis of this story was written with the help of an AI tool)
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.