Key points
The Japanese yen took a breather from its recent rally as the BOJ began its two-day meeting on Tuesday. Last week, the yen surged over 2% against the dollar.
Several factors have contributed to the yen’s strengthening from the 38-year low of 161.96 against the dollar at the start of the month, including a global stock rout and monetary policy expectations.
The BOJ has already announced plans for quantitative tightening, with a moderate view suggesting the bank will halve its monthly bond purchases over two years.
However, questions remain about whether the BOJ will increase rates on Wednesday, potentially marking Japan’s second hike this year. The central bank has a history of falling short of hawkish market expectations.
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The greenback was last 0.12% higher, fetching 154.205 against the yen. The dollar index, which measures the currency against a basket of peers, was little changed at 104.64.
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The Fed is widely expected to hold rates steady this week, but markets anticipate the U.S. central bank will begin cutting rates at the next meeting in September. Investors will listen for any hints from Fed Chair Jerome Powell on how soon policymakers might cut rates during his press conference.
While the Fed does not meet in August, Powell could use the Jackson Hole gathering of central bankers in late August to prepare the market for a rate cut, giving policymakers more time to assess economic data. This includes Friday’s July employment report, as Fed officials focus increasingly on potential harm to the labour market if borrowing costs remain above inflation for too long.
Failing to give a clear signal of a September cut this week could lead to a strengthening of U.S. Treasury yields and the dollar.
Meanwhile, the Bank of England’s first interest rate cut since 2020 remains uncertain, as key policymakers have not spoken publicly for more than two months due to rules in the run-up to July 4’s election.
Sterling was last trading at $1.28495, down 0.08% on the day. The euro was nearly flat at $1.0816. Elsewhere, the Australian dollar fell 0.05% versus the greenback to $0.6546, and the kiwi was mostly unchanged at $0.5876. In cryptocurrencies, bitcoin last fell 0.77% to $66,843.53.
The cautious sentiment surrounding the BOJ and Fed meetings could lead to continued tight ranges for the dollar and yen. If the BOJ fails to hike rates, the yen may weaken, while a clear signal from the Fed on rate cuts could bolster the dollar.
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