Can US Data and BOJ Policy Break USD/JPY out of range?

USD/JPY remains almost unchanged following the Federal Reserve interest rate decision and ahead of the Bank of Japan's announcement on Friday.

The Fed holds as Warsh plays it cool

The U.S. dollar trades a touch lower against its major peers after the Federal Reserve voted to leave interest rates unchanged at 3.75%–4%, in line with expectations. With the midterm elections next week, the hold was 90% priced in, and the decision vote was 10–2.

The Fed upgraded its assessment of the U.S. economy, saying growth was running at a strong pace, while also acknowledging that much of the discussion centred on price stability.

However, comments by Federal Reserve Chair Kevin Warsh created some confusion regarding the outlook for rate hikes next year. Warsh implied that it might be possible to lower inflation to the 2% target without significantly impacting growth or raising unemployment or without “throwing sand in the gears”. This prompted traders to slightly rein in expectations for monetary policy tightening next year.

His comments have been interpreted as less hawkish than expected, with the market having looked for guidance on a December hike. According to the CME FedWatch tool, traders are now pricing in a 81% chance of a hike in December, down from 84%, reflecting that slight dovish repricing.

The 2-year Treasury yield, which is closely tied to Fed rate expectations, has moved lower. Meanwhile, the U.S. Dollar Index has also edged lower, although its bullish trend remains intact.

Will US data reverse the slight dovish reaction to the Fed decision?

Attention now turns to U.S. core PCE, the Fed's preferred gauge of inflation, which is expected to rise 0.3% month on month in September, up from 0.2%. On an annual basis, it is expected to rise to 3.1%, versus 3% in August.

U.S. Q3 GDP is also expected to expand at an annualised rate of 3.2%, up from 2.2% in the previous quarter, highlighting a strong, growing economy.

These data points could trigger a bigger market reaction than the Fed meeting. Strong data and hotter-than-forecast inflation would fuel expectations of a more hawkish Federal Reserve, while the Fed's emphasis on waiting for further data before making additional decisions could temper those expectations.

Stronger-than-expected core PCE and GDP could reverse the recent dovish repricing of the Fed, lifting Treasury yields and the dollar, while softer data could reinforce expectations of a less hawkish policy path and put downward pressure on USD/JPY.

Can the BOJ support the yen?

Attention will now turn to the Bank of Japan, which concludes its two-day policy meeting on Friday and is expected to leave interest rates unchanged at 1.25%, having raised rates by 50 basis points so far this year.

With Japanese inflation closer to its 2% annual target and core CPI rising to 2.1% year on year in September, the central bank has signalled that it will continue to consider further rate hikes.

Rising energy and raw material costs have lifted PPI and consumer price inflation, and these pressures are starting to show signs of spreading more broadly through the economy.

However, some uncertainty over the outlook for the Japanese economy, owing to headwinds from the Middle East conflict, may be a deciding factor in how aggressively the BOJ can raise rates in the coming months.

The broad expectation is that the BOJ will continue to hike at a quarterly pace of 25 basis points, with another hike in December and one after that in March.

However, the key risk for dollar bulls is that a stronger signal of a December BOJ hike could narrow the U.S.–Japan interest-rate differential and support the yen, while a break above 159 would bring the risk of Japanese intervention into sharper focus as the pair approaches 160.

USD/JPY – technical analysis

After recovering from the 2026 low around 154.40, USD/JPY has been trading in a holding pattern around the 250 EMA. The price has been capped on the upside by 159 and broadly supported on the downside by the 157 support zone. The RSI remains neutral, giving little away.

Hot U.S. data, combined with a slightly dovish-sounding BOJ, could see the pair break above 159. A rise above here brings the 160 resistance zone into focus, together with the prospect of intervention from Japanese authorities.

On the downside, weaker USD combined with a hawkish BoJ could spur a break below the 157 support zone, turning attention to 155, ahead of 153, the 2026 low.