This week's outlook calls for choppy dollar/yen trading ahead of the Japan and US monetary policy announcements, with the size of the BoJ's rate hike and its handling of the press conference, the US FOMC's decision, and expectations of further ECB rate hikes likely to be the market's main focus.
With monetary policy announcements from Japan and the US due next week, dollar/yen could move sharply depending on the size of the BoJ's rate hike and its stance toward further increases. If the BoJ is considering a hike of as much as 0.50%, the move could surprise the market and drive the yen higher and the dollar lower. Even if the hike is limited to the standard 0.25%, the yen is likely to come under stronger upward pressure on narrowing Japan-US interest rate differentials if Governor Ueda signals a positive stance toward further hikes at his press conference. Conversely, if the BoJ maintains a cautious stance, yen selling could dominate at times as the market takes the view that the main event has passed.
At the US FOMC, markets have increasingly priced in a 0.25% rate hike following the August PPI data. After the decision, the focus will be on the Fed chair's future policy path and views on inflation. If the policy rate is left unchanged, uncertainty in the market could increase, raising the risk of stronger downward pressure on the dollar.
The ECB is expected to raise rates at this week's Governing Council meeting, and expectations of further hikes from October onward, based also on President Lagarde's remarks, are supporting the market. While this is helping to underpin the euro, dollar movements could make dollar direction the dominant force in euro/dollar trading.
Continued remarks by Treasury Secretary Bessent regarding the correction of yen weakness are also likely to affect dollar/yen trading. Even after these factors have passed, caution is expected to persist in the currency market, and dollar/yen's upside is likely to remain limited.