July 30 2024: The dollar and yen traded within narrow ranges on Tuesday as traders awaited key central bank decisions, starting with midweek monetary policy meetings from the Bank of Japan (BOJ) and the Federal Reserve (Fed) that could influence market direction in the coming weeks.
The Japanese yen paused its recent rally as the BOJ began its two-day meeting on Tuesday, after surging over 2% against the dollar last week.
Several factors have contributed to the yen’s strength from the 38-year low of 161.96 it hit against the dollar at the start of the month, including a global stock market decline and increased bets on a potential interest rate hike from Japan’s central bank this week.
Markets are currently pricing in a 63% chance of a 10 basis points hike.
The BOJ has already indicated plans to announce quantitative tightening (QT), with a moderate expectation that the bank will gradually reduce its monthly bond purchases by half over a two-year period.
However, there are uncertainties about whether the BOJ will increase rates on Wednesday amid tepid economic growth.
“The real risk from the BOJ is no hike and a weaker yen, given their tendency to undershoot expectations at recent meetings, and hopes of a hike sitting quite high,” said Matt Simpson, senior market analyst at City Index.
The dollar was 0.08% higher against the yen, trading at 154.125.
If the BOJ decides against a hike, the dollar is likely to find near-term support around current levels against the yen, according to Andy Ji, senior Asia FX strategist at InTouch Capital Markets.
While expectations of narrowing interest rate differentials have eased pressure on the yen, Ji noted that the still wide U.S.-Japan yield differential “is another reason that the yen rally will meet more resistance.”
The Fed is widely expected to maintain its current stance on Wednesday, although markets are betting that the U.S. central bank will begin cutting rates at the following meeting in September.
Investors will be closely monitoring any hints from Fed Chair Jerome Powell about how soon policymakers are prepared to cut rates during his press conference.
Although the Fed does not meet in August, Powell could use the Jackson Hole gathering of central bankers later in the month to prepare the market for a rate cut, giving policymakers more time to assess economic data.
This includes Friday’s July employment report, with Fed officials increasingly focused on the potential harm to the labor market if borrowing costs remain above inflation for too long.
However, failing to provide a clear signal of a September cut this week could lead to an increase in U.S. Treasury yields and the dollar, noted Simpson of City Index.
The dollar index, which measures the currency against a basket of peers, was little changed at 104.56.
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 $1.2857, down 0.02% on the day. The euro was up 0.05% at $1.0824.
Elsewhere, the Australian dollar rose 0.09% against the greenback to $0.65555 ahead of a key inflation report due Wednesday that could influence the Reserve Bank of Australia’s decision on another rate hike.
The New Zealand dollar climbed 0.27% to $0.58915, recovering slightly from multi-month lows hit on Monday.
In cryptocurrencies, Bitcoin fell 1.08% to $66,634.87.
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