Japanese Yen trims gains with Fed and BoJ decisions looming

The Japanese Yen experienced slight losses against the US Dollar on Monday, yet remained near seven-month highs due to a 4% rally in the previous two weeks. The USD/JPY pair traded just above 153.50, after recovering from last week's lows at 152.90, but still fell short of the support level around 155.20. The US Dollar gained strength on Friday after the US Consumer Price Index (CPI) report revealed inflation remained high, above the Federal Reserve's target rate, with core inflation surging in August.

This boosted expectations that the US central bank would raise interest rates on Wednesday, possibly more than once before year-end. Analysts at ING believe that "the dollar would welcome a hike" as it would reinforce the Fed's monetary policy credibility and dampen the devaluation trade. They also suggest that modestly higher rates at the short end of the US curve would further support the dollar.

In contrast, Yen dips are expected to be limited as investors anticipate a hawkish interest rate hike by the Bank of Japan (BoJ) later in the week. Strategists at OCBC note that markets are "largely positioned for a 25bp hike" this week, flipping speculative positioning to net long JPY for the first time since February. The USD/JPY pair rallied at the start of a new week, nearing the 154.00 mark, reversing some of Friday's losses.

However, the pair remains confined in a range seen over the past week and near a nearly seven-month low touched last Tuesday, with traders waiting for key central bank events this week.