US Data and BOJ Policy Could Push USD/JPY Beyond Its Range

Following the Federal Reserve's interest rate decision, USD/JPY is little changed, with the Bank of Japan due to announce its decision on Friday.

Fed leaves rates steady as Warsh tempers tightening expectations

Interest rates remain at 3.75%–4% after the Federal Reserve's widely anticipated decision, leaving the U.S. dollar marginally weaker against its major counterparts. A hold had been 90% priced in ahead of next week's midterm elections. The decision passed by a vote of 10–2.

In its assessment of the U.S. economy, the Fed took a more positive view, describing the pace of growth as strong. It nevertheless acknowledged that price stability had dominated much of the discussion.

The outlook for rate increases next year was less clear after comments from Federal Reserve Chair Kevin Warsh. Inflation might be brought back to the 2% target, he suggested, without a significant impact on growth, a rise in unemployment or “throwing sand in the gears”. In response, traders modestly reduced their expectations for monetary policy tightening next year.

Having sought a steer on a December increase, markets judged his comments to be less hawkish than expected. According to the CME FedWatch tool, the probability traders assign to a December hike has fallen from 84% to 81%, reflecting a small shift towards a more dovish outlook.

A decline in the 2-year Treasury yield has accompanied that shift in Fed rate expectations, to which the yield is closely linked. The U.S. Dollar Index is also slightly lower, but its upward trend has not been broken.

U.S. data could overturn the modest dovish response to the Fed

A September increase of 0.3% month on month, compared with 0.2% previously, is expected for U.S. core PCE, the Fed's preferred inflation gauge and the next focus for markets. The annual reading is forecast to rise from August's 3% to 3.1%.

For U.S. Q3 GDP, the forecast is for annualised expansion of 3.2%, following 2.2% in the previous quarter. That would point to an economy continuing to grow strongly.

The Fed meeting's market impact could be eclipsed by these releases. Expectations for a more hawkish Federal Reserve would gain support from strong activity figures and inflation above forecasts. Against that, the Fed's stated preference for awaiting more data before further decisions could restrain such expectations.

Should core PCE and GDP exceed expectations, Treasury yields and the dollar could rise as the recent dovish reassessment of Fed policy unwinds. Below-forecast figures could instead add weight to expectations for a less hawkish course, leaving USD/JPY under downward pressure.

Yen support hinges on the BOJ's policy signals

A hold at 1.25% is expected when the Bank of Japan wraps up its two-day policy meeting on Friday. The announcement is the next focus, following rate increases totalling 50 basis points so far this year.

Further rate increases remain under consideration, the central bank has indicated, as Japanese inflation draws nearer to its 2% annual target. September's core CPI reading showed a rise of 2.1% year on year.

Energy and raw materials have become more expensive, driving up PPI and consumer price inflation. Signs are now emerging that the resulting pressures are extending into the wider economy.

The scope for BOJ rate increases over the coming months may, however, depend on uncertainty surrounding Japan's economic outlook. Headwinds from the Middle East conflict are contributing to that uncertainty and could determine how aggressively the bank can tighten.

Expectations generally favour further BOJ increases of 25 basis points each quarter, with a December hike followed by another in March.

A firmer signal that the BOJ will raise rates in December poses the main risk to dollar bulls, since it could compress the U.S.–Japan interest-rate differential and lend support to the yen. A breach of 159, meanwhile, would heighten the focus on possible Japanese intervention as the pair moves towards 160.

USD/JPY holds its range as technical signals remain neutral

Around the 250 EMA, USD/JPY remains rangebound following its recovery from the 2026 low near 154.40. Advances have stalled at 159, while the 157 support zone has generally held on declines. A neutral RSI offers little indication of the next direction.

An upside breach of 159 could come from strong U.S. releases coupled with a mildly dovish BOJ tone. Beyond that threshold, attention would shift to resistance around 160 and the possibility that Japanese authorities might intervene.

A weaker USD and a hawkish BoJ, by contrast, could push the pair through support at 157. Below that zone, 155 would be the next level in view, followed by the 2026 low of 153.