USD/JPY moves on a downward path near 149.40 on Fed’s interest rate uncertainty

• USD/JPY continues the losses on the Fed’s uncertainty regarding interest rate trajectory.
• US Dollar could gain momentum due to the risk aversion over the Middle East conflict.
• BoJ is expected to intervene in the FX market to prevent the depreciation of Japanese Yen.

USD/JPY extends its losses on the second successive session, trading lower around 149.40 during the Asian session on Monday. The uncertainty regarding the Federal Reserve's (Fed) future decisions on interest rates is contributing to a complex and fluctuating environment for the US Dollar (USD).

Multiple Fed officials have indicated that the central bank could refrain from implementing a rate hike in November due to the surge in bond yields, which has led to tightened financial conditions. This development seems to act as a headwind for the USD/JPY pair.

The US Dollar Index (DXY) trades slightly lower around 106.50. The US Dollar (USD) faced a challenge since the preliminary US Michigan Consumer Sentiment Index for October was released on Friday. The report indicated a decline to 63.0 from the previous reading of 68.1, falling short of the expected figure of 67.4.

Furthermore, the US Dollar could draw support from safe-haven demand amid escalating geopolitical tensions between Israel and Palestine. According to an undisclosed source cited by Reuters, discussions have taken place between US officials and Israel regarding the potential visit of President Joe Biden to Israel. The reported invitation for this visit comes from Israeli Prime Minister Benjamin Netanyahu.

Furthermore, the recovery in US Treasury yields from recent losses could contribute to underpinning the US Dollar (USD). As of Monday, the 10-year US Treasury bond yield stands at 4.65%, up by 1.0%.

Bank of Japan (BoJ) is expected to intervene in the spot market to prevent the losses of the Japanese Yen (JPY). The central bank has adopted a more dovish stance, undermining the safe-haven appeal of the JPY and providing support to the USD/JPY pair.

The BoJ maintains its perspective that inflation is transitory and has communicated no intentions of scaling back its substantial monetary stimulus measures.

As per S&P Global's analysis of the Japanese economy and monetary policy, the rating agency expects that policy interest rates in Japan might undergo an upward trajectory, commencing in 2024.

US Retail Sales (MoM) is due to release on Tuesday, with expectations for a 0.2% rise in September compared to the previous reading of 0.6%. Investors will likely pay attention to Japan’s Merchandise Trade Balance Total for September.