Can the Japanese Yen find direction ahead of the BoJ interest rate decision?

• Caution ahead of the BoJ’s monetary policy decision leaves USD/JPY largely unchanged.
• Signals on a December rate hike are in focus as the BoJ is expected to leave rates unchanged on Friday.
• The Dollar finds little support despite US inflation and GDP readings sustaining hawkish expectations for the Fed.

Caution ahead of Friday’s Bank of Japan (BoJ) monetary policy decision keeps USD/JPY broadly steady on Thursday. Although the Japanese Yen (JPY) is lagging most major peers, weakness in the US Dollar (USD) is limiting the pair’s upside. USD/JPY is trading near 157.90 at the time of writing.

After raising rates by 25 basis points (bps) in September and delivering a total of 50 bps of tightening this year, the BoJ is widely expected to leave its policy rate at 1.25%. Holding steady would allow policymakers more time to evaluate the impact of earlier hikes on borrowing conditions and economic activity.

The bank’s revised growth and inflation projections, along with Governor Kazuo Ueda’s press conference, will take centre stage given the broad expectation of unchanged rates on Friday. With higher energy prices and a weak Yen pushing up import costs and adding to inflationary pressure, traders expect a further rate increase in December.

Prices excluding fresh food climbed 2.1% YoY in the latest inflation release, compared with 1.7% previously, exceeding the BoJ’s 2% target. The measure excluding both fresh food and energy accelerated from 1.9% to 2.4%. Ahead of the policy decision, Japan’s October Tokyo Consumer Price Index (CPI) and September unemployment data will offer a further assessment of inflation and labour market conditions.

Guidance for the year-end matters more to FX markets than the immediate decisions at the upcoming BoJ meetings, according to analysts at Commerzbank. As they put it, “for FX markets, the more important question will therefore be what the BoJ signals about December.” The analysts note that “markets currently price in an around 80% probability of a rate hike by then,” describing this as “in line with our own expectation that the BoJ will raise the policy rate to 1.5%.” Their assessment is that “recent BoJ communication, alongside the economic backdrop, increasingly suggests that the next step towards policy normalization is approaching.”

Thursday’s releases from the United States (US) showed an acceleration in annual headline and core PCE inflation, alongside stronger-than-expected third-quarter GDP growth. While personal income and spending missed forecasts, jobless claims came in below expectations, indicating that layoffs remained low.

A December interest rate increase by the Federal Reserve (Fed) remains firmly on the table following these readings, after policymakers left rates unchanged on Wednesday. However, the US Dollar is finding it difficult to retain its initial gains following the data. Having touched an intraday peak of 102.33, the US Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, is slipping towards 102.00.