Yen retreats from seven-month high at start of central bank week

The Japanese yen fell against a basket of major and minor currencies in Asian trading on Monday, moving away from a seven-month high against the US dollar amid correction and profit-taking, as a busy week of central bank meetings in the United States and Japan gets underway.

Markets are currently pricing in an 86% probability that the Federal Reserve will raise US interest rates by 25 basis points to counter rising inflationary pressures in the United States.

Meanwhile, the Bank of Japan is widely expected to raise Japanese interest rates by 25 basis points this week, marking its second increase this year, with markets awaiting further signals on how far the central bank intends to continue normalizing monetary policy in the coming period.

The Price

• The Japanese yen today: The dollar rose 0.45% against the yen to ¥154.14, from the day’s opening level of ¥153.47, after recording a low of ¥153.37.

• The yen ended Friday up 0.6% against the dollar, its fourth daily gain in five sessions, reaching a seven-month high of ¥152.89 per US dollar during that period.

• The yen gained 1.75% against the dollar last week, its second consecutive weekly gain, supported by the Bank of Japan’s hawkish stance and an acceleration in the unwinding of yen carry trades.

US dollar

The US Dollar Index rose around 0.3% on Monday to a two-week high, reflecting broad gains in the US currency against a basket of global currencies.

The yield on the 10-year US Treasury note rose 0.3% today, extending gains for a sixth consecutive session and approaching a three-year high, providing further support for the US dollar.

The move in the US bond market comes as global oil prices trade near four-month highs, adding further inflationary pressure on Federal Reserve policymakers.

The Federal Reserve begins its two-day meeting on Tuesday, with its monetary policy decision due on Wednesday. Markets are pricing in an 86% probability of a 25-basis-point interest rate hike, which would mark the first increase since July 2023.

Bank of Japan

The Bank of Japan meets on Thursday and Friday this week, with markets pricing in a 100% probability of a 25-basis-point interest rate hike to 1.25%, marking its second increase this year.

According to a Reuters report citing four sources familiar with the Bank of Japan’s thinking, the central bank is preparing to raise interest rates this week, most likely by 25 basis points, and could signal a faster pace of monetary tightening in the future if price pressures increase the risk of inflation overshooting its target.

The sources said the Bank of Japan is unlikely to have a predetermined view of the terminal interest rate, as this will depend on how previous rate increases affect the economy and the extent to which companies pass higher input costs on to households.

Japanese interest rates

• Markets are now fully pricing in a 25-basis-point interest rate hike by the Bank of Japan at this week’s meeting, with the probability at 100%.

• The probability of another 25-basis-point interest rate hike at the Bank of Japan’s October meeting remains around 25%.

Japanese yen outlook

We expect that the yen will remain under pressure against the US dollar and could fall to a multi-week low, particularly if geopolitical tensions in the Middle East continue to escalate and global oil prices continue to rise.