• The Japanese yen has risen to around 139.80 against the US dollar in thin trading today, Monday, hovering near its highest levels since July 2023 amid a widening divergence in monetary policy between Japan and the United States.
• Widely, the Bank of Japan is expected to keep interest rates unchanged this week while leaving the door open for another rate hike, possibly in October.

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Last week, Bank of Japan Board Member Naoki Tamura said the BOJ should raise short-term interest rates to around 1% at least through fiscal 2026 to achieve its 2% inflation target on a sustainable basis. BOJ Board Member Junko Nakagawa also said the central bank will continue to raise Japanese interest rates if the economy and inflation move in line with its expectations. On the other hand, the US Federal Reserve is expected to cut interest rates for the first time in four years this week, with current market pricing in a larger 50 basis point cut.

The US Dollar and Federal Reserve Expectations

Interest rate decisions and expectations remain a key component of the forex markets. Clearly, the US Federal Reserve’s rate cut this week is a done deal. In contrast, financial markets expect the Bank of England to resist further rate cuts at next week’s policy meeting.

After a sharp sell-off, stock markets recovered while the dollar fell. Also, the dollar struggled to hold onto the gains it made after last Wednesday’s inflation data. On this basis, MUFG Bank commented; “The August CPI report does not significantly change our expectations for a weaker US dollar. We continue to expect the weakness in the US Labor market to encourage the Fed to accelerate rate cuts later this year.” The European Central Bank, for its part, cut its deposit rate by 25 basis points to 3.50% at its policy meeting on Thursday, in line with consensus expectations.

Furthermore, the bank announced that there would be a narrowing of the spreads on other benchmark interest rates, thus cutting the main refinancing rate by 60 basis points to 3.65%. also, the bank’s core inflation forecast was revised slightly higher.

Meanwhile, there were no specific directions from ECB President Lagarde as she insisted that decisions would be data dependent. As far as US data releases are concerned, initial jobless claims rose slightly to 230,000 in the last week from 228,000 previously and slightly above consensus forecasts. According to the economic calendar, producer prices rose 0.2% on a monthly basis with an annual increase of 1.7% from 2.1% previously. Likewise, core prices rose 0.3% with an annual increase of 2.4%, slightly below expectations of 2.5%. Overall, economic data did not have a real impact on interest rate expectations in the market with a slightly more than 85% chance that the Federal Reserve will cut interest rates by 25 basis points at this week's policy meeting.

USD/JPY Technical Analysis and Expectations Today:

Based on the daily chart performance, the USD/JPY is moving in a strong downward trend and the break of the psychological support of 140.00. Previously, this level was often mentioned as a possibility as long as the Bank of Japan is determined to further tighten its monetary policy, has pushed all technical indicators towards oversold levels. As a result, the pair is moving towards new buying levels. Consequently, this will only be supported by investor sentiment towards the interest rate decisions of both the Bank of Japan and the US Federal Reserve this week. Also, these decisions are crucial to completing the downward trajectory or rebounding upwards again. Currently, we will see the closest support levels for the USD/JPY pair at 138.80 and 137.00, respectively.

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