BoJ's Dovish Hike Keeps Yen on the Back Foot
As had been broadly anticipated, the Bank of Japan on Friday raised its short-term policy rate to its highest level in 31 years, while indicating that any additional moves would hinge on how activity, prices and financial conditions evolve. The 7-2 split in the vote showed a board at odds with itself, and August inflation data that came in a touch softer trimmed wagers on a faster tightening cycle. Those factors dragged on the yen and lent support to USD/JPY, which had earlier reached a two-week peak before drifting back to roughly 156.75.[S1]
Geopolitical Risks and Fed Outlook Underpin the Dollar
Escalating tensions in the Middle East and the risk of a broader regional conflict helped the safe-haven US dollar halt its pullback from Friday's highest level since late July. Iran-backed Houthis in Yemen claimed attacks on sensitive sites in Riyadh on Saturday using missiles and drones, while Iran set out seven conditions for resuming talks with the United States, keeping the geopolitical risk premium elevated. Additionally, the Federal Reserve's hawkish stance, which points to at least one more rate hike this year, added to the greenback's appeal and supported USD/JPY. Traders, however, appeared cautious about making aggressive bullish bets ahead of further developments in the Middle East and a key meeting between US President Donald Trump and Chinese counterpart Xi Jinping on Thursday.[S1]
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Technical Levels Cap Upside for USD/JPY
Looking at the 4-hour chart, USD/JPY is trading beneath the 200-period simple moving average of 157.61 and has dropped back below the 61.8% Fibonacci retracement at 157.49, forming a thick band of resistance that implies upward moves may draw sellers. A clean close above that zone would open the door to the 78.6% retracement around 158.75 and the recent peak of 160.36. To the downside, the first floor sits at the 50.0% retracement near 156.60, followed by the 38.2% level at about 155.72 and the 23.6% retracement at 154.62, with a steeper slide potentially exposing the Fibonacci base at 152.85.[S1]
