Japanese Yen weakens as traders look ahead to Fed and BoJ monetary policy decisions

Ahead of Wednesday’s monetary policy decision from the Federal Reserve (Fed), USD/JPY inches higher on Tuesday as the US Dollar (USD) resumes its upward trend. Last week’s concerns surrounding AI are easing, diminishing the safe-haven appeal of the Japanese Yen (JPY).

Around 157.85 at the time of writing, the pair has recovered from Friday’s decline to 156.08, its weakest level since 18 September. The US Dollar Index (DXY), a measure of the Greenback against a basket of six major currencies, has meanwhile climbed to a two-week high near 102.23. Last week, it fell to 101.45, its lowest reading since 1 October.

Although “AI concerns have eased,” OCBC analysts say the “JPY’s return as a portfolio hedge is worth watching.” In their assessment, “it is too early to call an AI bust,” even as investors will “increasingly demand stronger revenues and cash flow to justify higher capex”. They add that “for now the jitters look more like noise than a sustained reversal.” Their conclusion is that “AI remains broadly USD-positive, but it is no longer a one-way USD trade.”

Following September’s 25 basis points (bps) increase to 3.75%-4.00%, the Fed is expected to leave interest rates on hold. That increase was its first since 2023, as policymakers sought to address inflationary pressures driven by higher oil prices amid the war in the Middle East.

With markets widely anticipating a pause, investors will scrutinise the policy statement and Chair Kevin Warsh’s press conference for indications of a December rate rise. Traders assign an 80% probability to such a move, according to the CME FedWatch Tool.

US Durable Goods Orders rose 1.8% in September, beating the 0.6% forecast and lending the Greenback modest support following Tuesday’s release. The underlying figures were less strong: orders excluding transportation grew 0.5%, just short of the 0.6% projection, while growth in core capital goods orders slowed from 1.6% to 0.5%. Separately, ADP’s four-week average of job gains declined from 17.5K to 16.8K.

After a cumulative 50 basis points (bps) of tightening earlier this year, the Bank of Japan (BoJ) is likewise expected to hold interest rates steady. Traders nevertheless anticipate a further increase in December.

Given the global backdrop, investors are likely prepared for a more cautious tone from BoJ Governor Ueda on Friday, according to MUFG/BTMU analysts, who say the Yen “may well struggle through this week,”. While they expect the BoJ to recognise that “more rate hikes are necessary,” they suggest Ueda’s communication style means he “may not provide a strong message on a move in December that remains 80% priced.”

For MUFG/BTMU, cautious guidance alongside already high expectations “could mean USD/JPY retraces further higher this week, especially if investor sentiment related to AI stabilises.”