USD/JPY holds below 150 ahead of BoJ meeting

• BoJ’s holding 2-day meeting on Monday and Tuesday

The Japanese yen is drifting on Monday after pushing the US dollar back below 150 on Friday. In the European session, USD/JPY is trading at 149.71, up 0.05%.

Will BoJ tweak yield curve control?

The Bank of Japan holds its two-day meeting beginning on Monday and there’s plenty of anticipation around the meeting. BoJ meetings were once dreary affairs that barely made the news, but that has changed in the era of high inflation.

The central bank has been an outlier with its ultra-loose monetary policy, insisting that inflation has been transient. The BoJ recently tweaked its yield curve control (YCC) program, widening the trading band for 10-year Japanese government bond yields to 1%, which sent the yen sharply higher.

There is pressure on the BoJ to again raise the trading band as yields have risen close to 0.90%. The surge in US Treasury yields has widened the US/Japan rate differential, which has weakened the yen. If the BoJ does not take any action at this meeting, the yen could weaken further, raising the risk of Tokyo intervening in the currency markets.

One move the BoJ is expected to take is to revise upwards its quarterly inflation forecasts. The latest Tokyo Core CPI reading rose from 2.5% to 2.7% y/y, an indication that underlying inflation remains sticky. If the BoJ does raise the inflation forecasts, it would signal a move toward monetary policy normalization, which could shore up the struggling yen.

The Federal Reserve has sounded hawkish about inflation and received support for its stance from Friday’s core PCE price index, which rose 0.3% in September, up from 0.1% in August and the highest level in four months. There are some inflation risks heading into next year, but the markets have priced in pauses in the November and December meetings.

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USD/JPY Technical

• 149.05 and 148.45 are providing support
• There is resistance at 149.91 and 150.51

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